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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1998 Commission File No. 0-7100
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BASE TEN SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
New Jersey 22-1804206
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Electronics Drive
Trenton, New Jersey 08619
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 586-7010
Securities registered pursuant to Section 12(g) of the Act:
Outstanding at
Title of each class March 26, 1999
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Class A Common Stock 21,204,264
Class B Common Stock 71,144
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K under the Securities Exchange Act of 1934 is not contained
herein, and will not be contained, to the best of the Registrant's knowledge, in
definitive proxy or information statements incorporated in Part III of this Form
10-K or any amendments to this Form 10-K (X).
As of March 26, 1999, 21,204,264 shares of Class A Common Stock and 71,144
shares of Class B Common Stock were outstanding, and the aggregate market value
of shares held by unaffiliated stockholders was approximately $15,457,000 and
$163,000, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Proxy Statement for the 1999 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Report.
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<PAGE>
PART I
Item 1. Business
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*Forward Looking Statement
The following contains forward-looking information within the meaning of The
Private Securities Litigation Reform Act of 1995. Such forward looking
statements and paragraphs may be identified by an "asterisk" ("*") or by such
forward looking terminology as "may", "will", "believe", "anticipate", or
similar words or variations thereof. Such forward looking statements involve
certain risks and uncertainties including the particular factors described below
in this Business discussion as well as throughout this annual report and in each
case actual results may differ materially from such forward looking statements.
Successful marketing of BASE10(TM)ME, BASE10(TM)CS and BASE10(TM)FS and their
future contribution to Company revenues depends heavily on, among other things,
successful early completion of current test efforts and the necessary
corrections to the software permitting timely delivery to customers, none of
which can be assured. Other important factors that the Company believes may
cause actual results to differ materially from such forward looking statements
are discussed in the "Risk Factors" sections in the Company's Registration
Statement on Form S-3 (File No. 333-46095) as well as current and previous
filings with the Securities and Exchange Commission. In assessing forward
looking statements contained herein, readers are urged to read carefully those
statements and other filings with the Securities and Exchange Commission. The
Company does not undertake to publicly update or revise its forward looking
statements even if experience or future changes make it clear that any projected
results or events (expressed or implied) will not be realized.
Overview
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Base Ten Systems, Inc. (the "Company" or "Base Ten") was founded in 1966 and
became publicly traded in 1968. Through its earlier history, the Company's focus
was designing and producing products for defense and space programs ranging from
airborne telemetry installed in the Apollo spacecraft to high performance
weapons controllers used during operation Desert Storm through its Government
Technology Division ("GTD"). As the "cold war" came to an end, management
recognized that declines in U.S. and NATO spending required that Base Ten
develop commercial lines of business.
As an outgrowth of strategic planning work begun in 1990, management began
looking at new business lines leveraging its experience in developing safety
critical technology applications. With the promise of significant growth, the
pharmaceutical and medical device markets emerged as likely targets of
opportunity for the "new" Base Ten. Specifically, the development and marketing
of software solutions for the manufacture of pharmaceuticals and medical devices
addressed a totally unserved market niche. The Company established the Medical
Technology Division ("MTD") to address the differing development, manufacturing,
marketing, and sales needs of the commercial sector.
Losses resulting from reduced revenues from the shrinking defense market
coupled with considerable product development and marketing expense in the MTD
produced increasing operating losses for Base Ten as a whole. In 1997, the
decision was reached to sell the defense related business and focus exclusively
on the opportunities offered in the medical technology market. On December 31,
1997, following shareholder approval, Base Ten completed the sale of the GTD to
Strategic Technology Systems, Inc. ("Strategic"). On January 29, 1998 the
Company elected to change its fiscal year to an accounting period January 1
through December 31.
Since the establishment of the MTD, Base Ten has been designing, developing,
and marketing comprehensive software solutions for regulated manufacturing
industries, and most recently, computerized Manufacturing Execution Systems
("MES") for the pharmaceutical and medical device industries. Management focused
on the MES markets, as it believes there is a strong potential for growth over
the next few years. Factors contributing to this decision include the growing
pressure on the Company's customer base to comply with regulations promulgated
by the Food and Drug Administration ("FDA"), the International Standards
Organization ("ISO 9000"), and other industry standards such as Good Automated
Manufacturing Practices ("GAMP"). In addition, increasing competitive influences
brought on by a) recent business combinations occurring in the customer market,
and b) the rise in purchasing power among HMOs and other benefit programs, have
underscored the need for manufacturers to be even more cost efficient.*
Base Ten'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 programs based on 20 plus years of experience designing electronic
applications used primarily in weapons management systems for military aircraft.
Base Ten has applied this expertise to the development of its MES products. The
Company's premier product was PHARMASYSTTM. It was a computerized manufacturing
execution system designed specifically for the pharmaceutical, medical device,
biotechnology, and chemical industry. Based upon the technology used in
PHARMASYSTTM, the Company developed the BASE10TMME product line (formerly known
as PHARM2TM). In addition, the assets of the FlowStream product, a similar MES
offering, were purchased from Consilium, Inc., in February 1998, and renamed
BASE10TMFS (refer to Note D to the Consolidated Financial Statements). Lastly,
the clinical supplies market, a subset of the pharmaceutical manufacturing
segment, was identified as an attractive business opportunity. In September
1998, using software similar to BASE10TMME, the Company introduced BASE10TMCS.
BASE10TMME operates on a PC-based system using distributed WindowsTM NT
client-server architecture. BASE10TMFS uses a distributed HP-UX or Digital
VAX/VMS client-server architecture, object-oriented design, application
programming, and a relational database. They are both fully scalable and may be
implemented in a single operation, department, or across an entire supply chain.
The advantages of gradual integration are maximized user-level performance and
the ability to adjust quickly to ever-changing demands. An intuitive user
interface eases the task of data entry and retrieval with icons, selection
boxes, and an intelligent form designer. In addition, Base Ten's MES products
are not custom solutions or tool kits. They are designed and marketed as
standard applications, for implementation into a customer's existing
manufacturing facility. Both MES products act as electronic monitors, ensuring
that the production process complies with a predefined set of specifications in
order to produce a consistent product. Base Ten is engaged in a continuous
program to maintain compliance with an industry generated standard for GAMP as a
means of differentiating itself from present and future competition.*
BASE10TMCS, a Clinical Supplies Materials Management System, is an analog of
BASE10TMME. It was designed for pre-approval product testing and is based on a
distributed Windows NT client-server platform for application within Phase II
and III clinical trials. BASE10TMCS helps to ensure that a secure and steady
flow of the trial product is available for distribution. The effective
management of patient pack supply is critical for obtaining regulatory approval
as well as for meeting or exceeding time to market goals. In an increasingly
competitive global market, where the pressure to launch new drugs is mounting,
the need for an automated material management system like BASE10TMCS is clear.
It allows rapid fulfillment of requests, full support of traceability
requirements, while maintaining full compliance with FDA procedures. Historical
operations data is stored in a relational database which can be readily accessed
to support a new drug application, real-time production analyses, and
ultimately, timely scale-up to commercial production. *
The Company believes that BASE10TMME, BASE10TMFS and BASE10(TM)CS address
many of the unique challenges faced by these regulated industries. For a large
number of companies, managing, controlling, and documenting the manufacturing
process and pre-approved product testing process, in real-time, while reducing
costs, and remaining in compliance have been difficult. Base Ten's products
offer state-of-the-art software solutions that reduce paperwork, human error,
and the time required to review, approve, and analyze batch records. More
importantly, since customers and prospects have indicated that compliance with
industry standards is imperative, efforts have been focused on ensuring that the
products are also in compliance with the FDA current Good Manufacturing Practice
("cGMP"), ISO 9000, and GAMP*.
To appreciate the advantages of Base Ten's products, it is important to
understand the functions that a manufacturing execution system is designed to
perform. MES are software programs designed to create uniformity in a production
sequence by defining the elements of each production step. They 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 defined procedures were followed.
Paper-based systems are 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 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.
Base Ten believes there is a compelling and immediate need for the
pharmaceutical and medical device industries to implement MES that are cost
effective, are flexible, and facilitate the demonstration of compliance with FDA
cGMP regulations. It is also believed that these industries are actively seeking
suppliers and products to aid in compliance. Base Ten's manufacturing execution
systems are designed to enable these companies to meet their needs in a way that
is consistent with how they presently do business. The Company's MES products
enable the customer to specify the individual steps of the production process.
They interface 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
they recognize an out-of-specification event, they can adapt to the
out-of-specification event 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, the Base Ten products will
not authorize commencement of the next production step and can issue a problem
notification to supervisory or quality control personnel. In addition,
BASE10(TM)ME, BASE10(TM)FS, and BASE10(TM)CS chronologically track and
electronically record each input, procedure and output, which provides a
significant tool for the customer to demonstrate ongoing cGMP compliance. *
Base Ten's products provide a standard set of MES applications, and not a
set of tools that the customer must learn to use in order to develop a solution.
An intelligent MES software set was created that is both flexible and robust.
Fully integrated modules, that are linked to a system's database, are the key to
rapid implementation. Base Ten's standard MES products can be configured with
the appropriate modules to meet a customer's specific requirements.
Additionally, the features and functions required to support FDA cGMP are built
into the standard base product.
The Company believes that BASE10TMME, BASE10TMFS, and BASE10TMCS are
applicable to the highly regulated pharmaceutical and medical device
manufacturing industries. The production of pharmaceuticals is subject to FDA
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 cGMP. These software
products, through Base Ten's program of meeting GAMP requirements, is intended
to support the manufacturer's verification of a compliant production process in
a manner which Base Ten believes is acceptable to the FDA. *
Partnerships
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The Company has entered into collaborative relationships with industry
recognized engineering firms and system integrators that can implement, and/or
validate our products. The Company has established partnerships with Walsh
Automation, a Canadian systems integrator; WTI Systems Ltd, an English systems
integrator; Toyo Engineering Co., a Japanese developer of turnkey manufacturing
facilities; KPMG LLP and Foster Wheeler, providers of services and integration
to the pharmaceutical industry; Taisei Corporation, a construction and
engineering company in Japan and Euriware, a European based integrator.
In addition, Base Ten has established strategic and technology alliances
that enhance its product portfolio and technology offerings. Some of the
partnerships include, but are not limited to the following: Microsoft, a leading
technology software provider; Intellution, a leading supplier of Supervisory
Control and Data Acquisition/Batch Control and Execution software; and
Documentum, a leading supplier of Document Management software. Additionally,
the Company has partnered with Compaq, Novasoft, Beckman Coulter, and SAP to
offer the Integrated Pharmaceutical Supply Chain Consortium utilizing the
BusinessBus technology. This is a new solution set for complex pharmaceutical
manufacturing environments based on industry standard message queuing
technology. It provides for seamless integration of disparate enterprise and
manufacturing applications without custom coding interfaces and without
modifying original code. In addition, the Company has embarked on a
certification effort with SAP to provide official recognition of the interfacing
between the two software products.*
These relationships have not yet produced significant revenues, however
additional product development is necessary before the anticipated benefits are
fully recognized. Base Ten believes that such relationships are necessary if the
Company is to achieve its market potential. Through the announcement of these
alliances, Base Ten has benefited by gaining increased exposure for its product
line. Seminars, conducted jointly with partners, highlight the benefits and
demonstrate the applicability and ease of use of its products.
Other Products
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Ultrasound Imaging Products. Base Ten introduced uPACS(TM), a system for
archiving ultrasound images, in 1994. The 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 was not a
commercially viable product in its current state of development, despite the
fact that it expected to receive FDA clearance of a pre-market notification
application ("510(k) clearance"), which was ultimately granted in 1996.
The Company continued development efforts of uPACS(TM), and in May 1997
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. In exchange for such capital contribution, the Company received a 9%
interest in the LLC. A then outside investor, who is currently a principal
shareholder of the Company, made a total capital contribution of $3 million in
return for a 91% interest in the LLC. See Note M to the Consolidated Financial
Statements for further information on this arrangement. During the fourth
quarter of 1998, the Company determined that it did not have the required
resources to devote to both its core manufacturing execution software business
and the uPACS(TM) business, and as a result, initiated a search for a potential
buyer of the LLC and its technology.
Government Technology Division
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As discussed above in the "Overview", on December 31, 1997, following
shareholder approval, the Company, completed the sale of the GTD to Strategic.
Strategic was a newly formed corporation managed and partially owned by
individuals who were, prior to the GTD Sale, members of the Company's senior
management (the "Management Group"). Members of the Management Group were
significantly involved in the business and development of the GTD while employed
by the Company and left the Company's employ to join Strategic concurrently with
the GTD Sale. Strategic acquired substantially all of the net operating assets
of the GTD in exchange for certain consideration pursuant to the terms and
conditions set forth in an Asset Purchase Agreement between the Company and
Strategic dated October 27, 1997.
Sales and Marketing
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The Company offers a portfolio of software products and service solutions
for use in the pharmaceutical, clinical supplies (a subset of pharmaceuticals),
fine chemicals, and medical products industries. During 1998 Base Ten's sales
and marketing efforts were focused on MES and clinical supplies materials
management applications for the FDA-regulated industries. The Company currently
markets its products through a direct sales force in North America and Europe.
The sales staff is currently based, domestically at Base Ten's corporate
headquarters in New Jersey, and in California, and abroad in England, Germany
and Belgium. The Company's sales force conducts presentations and demonstrations
to management and end users at the customer site as part of the direct sales
effort.
Base Ten supplements its direct sales efforts with a variety of marketing
initiatives including public relations activities, telemarketing, advertising in
industry periodicals, trade shows, industry symposiums and workshops, and user
group conferences. In addition, the company's website, is actively being used as
a sales and marketing tool. While it is a valuable communications conduit, it
has also been useful in making initial company and product introductions. The
website has also proven to be an effective and efficient way to run annotated
product demos for potential customers.*
Research and Development
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Base Ten's research and development efforts are currently directed at the
continued evolution of its existing products and clinical supplies applications
that will utilize ActiveX components and browser based client technologies. The
future generation of Base Ten's software will feature a rich function set and
support rapid user customizations, including connectivity with other systems.
The Company believes that this path ensures its leadership in the market for
world class cGMP manufacturing applications. *
During fiscal 1996 and 1997 the Company capitalized $4.1 million and $3.4
million, respectively, of software development costs almost all of which was for
development of PHARMASYSTTM and BASE10TMME, the Company's core MES software.
In fiscal years 1996, 1997, and 1998, Base Ten expensed approximately $0.4
million, $0.1 million, and $2.0 million, respectively, in research and
development expenditures. The development staff consists of approximately 34
development, project and quality engineers supported by test and administrative
staff.
Competition
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During 1998, the Company competed in the MES and Clinical Supplies software
markets. Base Ten faces three major sources of competition: paper-based systems,
commercial vendors of software products that develop one or more elements for
pharmaceutical manufacturing, and in-house computer programs.
The Company's competitors include POMS, ProPack GmbH, SAP AG, Elan
Informatique, and Courbon. Several of the competitors offer products that are
either toolkits, requiring significant customization, or that provide only
specific pieces of MES applications, and/or that focus on other vertical
markets. Base Ten believes that the majority of Enterprise Resource Planning
("ERP") vendors will choose to partner or acquire the MES-specific functionality
in a Best-of-Breed manner rather than developing it in-house, although one has
stated otherwise. In addition, the Company feels that it gains a competitive
advantage by staying focused on the FDA-regulated vertical industries at a time
when other players are branching out into different markets. Another source of
competitive advantage comes from its continued development of functionality and
support for the evolving Clinical Supplies business. *
Base Ten believes that the internal Information System departments,
responsible for supporting year 2000 ("Y2K") initiatives and ERP projects,
provide a source of competition for product sales. In addition, the Company
competes with system integrators and internal corporate MIS departments for the
services business.
Competition among providers of software for manufacturers is likely to
increase for many reasons. A number of companies have announced plans to
introduce component-based products rather than developing an application for a
particular operating system. These applications are assembled from compatible or
wrapped components and have to exist, operate, and integrate in a component
run-time environment. Base Ten needs to support a standardized information
infrastructure that would enable integration and interoperability to
complementary software applications such as ERP Systems, Document Management
Systems ("DMS"), and Laboratory Information Management Systems ("LIMS"). This
effort will benefit our customers by reducing implementation complexity, time,
and cost. Plant investments are being driven by enterprise needs, therefore,
systems that simply automate existing production management activities are not
compelling enough to clear the investment hurdle. To demonstrate its competitive
advantage, Base Ten needs to excel at, and reduce, the cost of non-production
activities. The Company's success depends upon its ability to compete
effectively with commercial competitors. *
Despite the Company's belief that it ranks ahead of the known competition in
suitability for pharmaceutical manufacturing, there can be no assurance that it
will compete successfully with new or existing competitors or that competitive
pressures faced by Base Ten will not materially and adversely affect its
business and financial results. *
Proprietary Rights
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While the Company has received certain patent protection for its Base Ten
products, 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.
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
proprietary rights to the same extent, as do the laws of the United States.
There can be no assurance that the means of protecting its proprietary software
will be adequate or that competitors will not independently develop technologies
similar to that of the Company.
Under certain circumstances, customers of Base Ten may be entitled to
limited access of the BASE10TMME source code. Customer access to source code may
increase the products' possibility of misappropriation or other misuses of Base
Ten's software. Accordingly, it may be possible for unauthorized third parties
to copy certain portions of Base Ten's software or to obtain and use information
that the Company regards as proprietary. In addition, the Company has filed
applications for a patent covering certain aspects of the safety critical
technology.
Regulation
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Base Ten's software products do not require pre-marketing 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 FDA cGMP and are designed to be
integrated into a manufacturer's production systems. A pharmaceutical
manufacturer's systems, including any BASE10(TM)ME, BASE10TMFS, and BASE10(TM)CS
application, 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. Base Ten is engaged in a continuous program to
maintain compliance with GAMP.*
Other products Base Ten has developed are considered, and the archiving
software for ultrasound images that the Company is supporting 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 pre-market
notification application ("510(k) clearance") or FDA clearance of a pre-market
approval application ("PMA"). 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 Base Ten will be able to obtain required
clearances for any products it develops on a timely or cost-effective basis, if
at all.*
Employees
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The Company currently employs a total work force of 133 persons, including
43 engineers, plus additional contract labor. 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.
Product Liability Insurance
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Base Ten maintains product liability insurance of at least $5 million for
its products in the event a claim is made that the Company's products failed to
prevent defects in pharmaceutical products which resulted in injury to
consumers. There can be no assurances that the Company's existing insurance
would be adequate to cover any claims or that the Company will be able to obtain
and maintain adequate insurance in the future. The Company and Strategic have
agreed to each obtain insurance protecting the other from liabilities that could
occur because of defense products now in the field manufactured by the GTD while
part of the Company.
Foreign Operations
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Information on operations in different geographic areas is provided in Note
J to the Consolidated Financial Statements.
<PAGE>
Executive Officers of the Company
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The current executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Offices Held with Base Ten Period Served
- - ---- --- -------------------------- -------------
<S> <C> <C> <C>
Thomas E. Gardner 51 Chairman of the Board, President and 1997 to present
Chief Executive Officer
Alexander M. Adelson 64 Vice Chairman of the Board 1998 to present
C. Richard Bagshaw 59 Executive Vice President 1997 to present
William F. Hackett 48 Senior Vice President, CFO and
Secretary 1997 to present
Harvey I. Cohen 47 Senior Vice President and 1998 to present
Chief Technology Officer
Stephen A. Cloughley 38 Senior Vice President 1998 to present
</TABLE>
A summary of the business experience and background of the Company's
officers is set forth below.
Mr. Gardner has been President and Chief Executive Officer since November 1,
1997, a Director since December 31, 1997 and Co-Chairman of the Board from
December 31, 1997 to April 1998. In April 1998, Mr. Gardner was appointed
Chairman of the Board.
Mr. Adelson has been a Director since 1992. He served as Vice Chairman from
1997 until December 31, 1997, Co-Chairman of the Board from December 31, 1997 to
April 1998 and since April 1998, serves as Vice Chairman. From 1992 to 1998 Mr.
Adelson also provided investment and financial advisory services to the Company.
Mr. Bagshaw was President and General Manager of Syntex PR of Humacao,
Puerto Rico, a subsidiary of Syntex Pharmaceuticals, Palo Alto, California
subsequently acquired by Roche Holdings in 1995. From 1991 to 1996 he was
responsible for strategy development and implementation for corporate partnering
and talent upgrade.
Mr. Hackett was a Senior Manager for the Princeton Data Division of
Bloomberg Financial Markets from 1991 to 1997 responsible for the collection,
analysis, and distribution of information and product development.
Mr. Cohen joined Base Ten in 1980, as senior software engineer developing
alarm reporting and missile control systems. In 1993, Mr. Cohen became actively
involved in Base Ten's move to the industrial systems market and he was one of
the original developers of the company's MES concepts. Mr. Cohen is currently a
Senior Vice President of New Product Development and Chief Technology Officer.
Mr. Cloughley joined the Company in February 1994 as head of sales for
Europe. In 1996, he transferred to the corporate offices in Trenton to head the
marketing department. More recently, he has become Senior Vice President, in
charge of Corporate Strategy & Marketing.
Item 2. Properties
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The Company's principal office in the United States is in Trenton, New
Jersey. Base Ten leases an 82,000 square foot facility, which houses its
corporate headquarters and development and support activities. The lease for the
building expires in October 2009. Base Ten occupies approximately 42,000 square
feet of this property. Strategic occupies the remaining approximate 40,000
square feet, pursuant to a five-year sublease with the Company. Base Ten also
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. In addition, the
Company leases office facilities in California, Brussels, and Munich.
Base Ten's facility in 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 limited repurchase option exercisable at $4.3 million
through October 1999, $3.9 million from October 1999 through October 2004, and
then declining to $3.5 million during the last five years of the lease. See Note
K to the Consolidated Financial Statements.
Management believes that the Company's facilities are currently adequate for
its operations.
Item 3. Legal Proceedings
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The Company is involved from time to time in various claims and proceedings
including employee claims in the normal course of business none of which,
individually or in the aggregate, in the opinion of management, would have a
material adverse effect on the consolidated financial position and results of
operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- - ------------------------------------------------------------
On November 10, 1998, the Company held a Special Meeting of Shareholders. At
the meeting, the following were approved by the shareholders: (1) an amendment
to the Certificate of Incorporation to increase the authorized Class A Common
Stock from 40 million to 60 million shares, (2) the sale and issuance of Series
B Redeemable Convertible Preferred Stock (subject to the execution of definitive
agreements), (3) the issuance of Class A Common Stock Purchase Warrants to the
Series A Redeemable Convertible Preferred Stockholders that would receive Series
B Redeemable Convertible Preferred Stock, (4) the modification of the
outstanding $10 million 9.01% Convertible Subordinated Debenture, (5) the sale
and issuance of up to 6,666,666 shares of Class A Common Stock at a purchase
price of $3.00 per share, and Warrants to purchase up to 1,000,000 shares of
Class A Common Stock, (6) the amendment to the 1998 Directors' Stock Option
Plan, and (7) the amendment to the 1998 Stock Option and Stock Award Plan.
The sale and issuance of Series B Redeemable Convertible Preferred Stock
("Series B Preferred Shares") was issued to the Series A Redeemable Convertible
Preferred Stockholders in the form of an even exchange for Series A Redeemable
Convertible Preferred Stock ("Series A Preferred Shares") on March 5, 1999. The
terms of the Series B Preferred Shares are similar to the Series A Preferred
Shares, except that: (a) the Series B Preferred Shares have a conversion price
of $4.00, whereas the conversion price of the Series A Preferred Shares was
equal to the lesser of (i) $16.25 or (ii) the Weighted Average Price (as
defined) of the Class A Common Stock prior to the conversion date; and (b) the
Series B Preferred Shares, as a result of the conversion price of $4.00, will
not provide the holder with the option to receive a subordinated 8% promissory
note, as the Series A Preferred Shares provide. See Note N to the Consolidated
Financial Statements.
The issuance of Class A Common Stock Purchase Warrants to the Series A
Preferred Stockholders that received Series B Preferred Stock provide for the
issuance of 80,000 Class A Common Stock Purchase Warrants for each $1 million of
principal amount of the Series A Preferred Shares outstanding on November 10,
1998 in addition to certain other Series A Preferred Shares which were converted
at $4.00 per share between September 1, 1998 and November 10, 1998 on the date
of exchange. These purchase warrants are four-year warrants exercisable at
$3.00, and provide for mandatory exercise upon the occurrence of certain events.
The modification of the $10 million 9.01% Convertible Subordinated Debenture
authorized a decrease in the conversion price from $12.50 to $4.00 upon
conversion of the outstanding debenture.
In November 1998, the Company sold 6,666,666 shares of Class A Common Stock
at a purchase price of $3.00 per share for aggregate proceeds of $20,000,000.
For each $1 million of Class A Common Stock purchased, the purchaser received
seven-year warrants to purchase 50,000 shares of Class A Common Stock,
exercisable at $3.00 per share; a total of 1,000,000 warrants were, therefore,
issued to the purchaser. The placement agent also received warrants to purchase
up to $250,000 shares of Class A Common Stock.
<PAGE>
PART II
Item 5. Market for the Company's Common Stock and Related Shareholder Matters
- - ------------------------------------------------------------------------------
The Company's Class A Common Stock is listed on the NASDAQ National Market
System under the trading symbol BASEA. The Company's Class B Common Stock, which
traded under the symbol BASEB, was de-listed from the NASDAQ SmallCap Market
over the counter market in the second quarter of 1998. See Note O to the
Consolidated Financial Statements.
The following table sets forth the high and low sale prices of the Company's
Class A Common Stock and Class B Common Stock as reported by NASDAQ for the
periods indicated:
<TABLE>
<CAPTION>
Class A Common Stock Class B Common Stock
Bid Price Bid Price
--------- ---------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
Fiscal 1997:
- - ------------
First quarter.................. $ 12 1/4 $ 10 $ 14 3/4 $ 12
Second quarter................. 11 1/2 9 3/4 14 3/4 12 3/4
Third quarter.................. 10 7/8 9 7/8 14 1/4 11 1/2
Fourth quarter................. 16 9 3/4 16 10 1/2
November - December 1997....... $ 14 1/8 $ 9 5/8 $ 13 $ 11
- - ------------------------
Fiscal 1998:
- - ------------
First quarter.................. $ 10 1/2 $ 5 $ 10 1/2 $ 7
Second quarter................. 6 5/8 2 1/16 7 7/8 7 1/8
Third quarter.................. 5 3/16 1 9/16 N/A N/A
Fourth quarter................. 4 1 15/16 N/A N/A
</TABLE>
As of March 26, 1999, there were approximately 715 record holders of Class A
Common Stock and 119 record holders of Class B Common Stock.
Base Ten 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.
<PAGE>
Item 6. Selected Financial Data
- - -------------------------------
The following table presents selected financial data for Base Ten and its
consolidated subsidiaries. The financial data for the fiscal years ended
December 31, 1998, October 31, 1997 and 1996 and the two month period ended
December 31, 1997 have been derived from the Company's audited Consolidated
Financial Statements included elsewhere in this Report and should be read in
conjunction with those Consolidated Financial Statements and related Notes.
<TABLE>
<CAPTION>
Base Ten Systems, Inc. and Subsidiaries
(dollars in thousands except per share data)
Two-Months
Year Ended Ended Year Ended Year Ended Year Ended Year Ended
Dec 31, Dec 31, Oct 31, Oct 31, Oct 31, Oct 31,
1998 1997 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Summary of Operations:
Revenues $ 7,550 $ 181 $ 2,512 $ 1,262 $ 2,710 $ 584
Loss from continuing operations
before income tax benefit(1) $ (19,020) $ (3,714) $ (15,980) $ (9,097) $ (2,616) $ (125)
(2)
Income taxes (benefit) $ -- $ -- $ -- $ (684) $ (707) $ 24
Net loss from continuing operations $ (19,020) $ (3,714) $ (15,980) $ (8,413) $ (1,909) $ (149)
Net earnings (loss) from $ -- $ (222) $ (6,027) $ (546) $ 532 $ 184
discontinued operations
Net earnings (loss) $ (19,020) $ (3,936) $ (22,007) $ (8,959) $ (1,377) $ 35
---------- ---------- ---------- ---------- ---------- ----------
Net (loss) per common share
continuing operations $ (2.09) $ (.45) $ (2.03) $ (1.09) $ (.28) $ (.02)
Discontinued operations $ -- $ (.03) $ ( .76) $ (.07) $ .08 $ .05
---------- ---------- ---------- ---------- ---------- ----------
Net earnings (loss) per share $ (2.09) $ (.48) $ (2.79) $ (1.16) $ (.20) $ .03
---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
Summary Balance Sheet
As of : Dec 31, Dec 31, Oct 31, Oct 31, Oct 31, Oct 31,
1998 1997 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Working capital (3) $ 15,482 $ 6,080 $ 2,671 $ 14,115 $ 13,270 $ 5,860
Total assets $ 33,821 $ 24,413 $ 21,217 $ 30,397 $ 28,005 $ 17,609
Long term debt, net of current $ 13,341 $ 18,916 $ 18,925 $ 13,478 $ 3,525 $ 3,601
maturities (4)
Redeemable Preferred Stock $ 12,914 $ 6,155 -- -- -- --
Shareholders' equity (deficiency) $ 2,372 $ (6,054) $ (4,982) $ 12,140 $ 20,261 $ 9,431
</TABLE>
(1) Included in 1996 financial data is a write-off of capitalized software
cost of $2.4 million.
(2) Included in fiscal year October 31, 1997 financial data is $2.7 million
of expense relating to the fair market value of options and warrants issued
to non-employee consultants (see discussion in Results of Operations -
Continuing Operations).
(3) Included in fiscal 1997 is the reclassification of the assets and
liabilities of GTD as net assets held for sale.
(4) Included in 1994 to 1998 financial information is a long-term financing
obligation.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- - --------------------------------------------------------------------------------
General
- - -------
As discussed in Part 1, Item 1, on December 31, 1997, following approval by
shareholders, the Company sold the GTD (the "GTD Sale") to Strategic Technology
Systems, Inc. ("Strategic). On January 29, 1998, the Company elected to change
its fiscal year to an accounting period from January 1 through December 31. This
Annual Report on Form 10-K, for the fiscal year ended December 31, 1998, does
not include, except as indicated herein, the operations of the GTD.
Strategic was a newly formed corporation managed and partially owned by
individuals who were, prior to the GTD Sale, members of the Company's senior
management (the "Management Group"). Members of the Management Group were
significantly involved in the business and development of the GTD while employed
by the Company and left the Company's employ to join Strategic concurrently with
the GTD Sale. Strategic acquired substantially all of the operating assets of
the GTD in exchange for certain consideration and the assumption of certain
liabilities, pursuant to the terms and conditions set forth in an Asset Purchase
Agreement between the Company and Strategic dated October 27, 1997.
In February 1998, the Company purchased certain assets from Consilium, Inc.
Refer to Note D to the Consolidated Financial Statements and the "Continuing
Operations Overview" below for more information about this acquisition.
The Company's initial MES product was PHARMASYST(TM), which was introduced
in 1993. Utilizing the PHARMASYST(TM) technology, the Company developed and
released the BASE10(TM)ME product line. In June 1998, Base Ten released
BASE10(TM)ME version 2.3. The Company followed in September 1998 with the
release of BASE10(TM)CS, which is an analog of BASE10(TM)ME, designed for
pre-approval product testing.
Cost Reduction Measures
- - -----------------------
As a result of the purchase of the FlowStream product line in February 1998,
the Company experienced an increase in headcount of approximately 32 employees
bringing the total headcount for Base Ten to approximately 165 employees as of
the acquisition date. Base Ten also experienced a slight ramp up during the
first and second quarters of 1998 in headcount, independent of the FlowStream
product line acquisition, primarily in the areas of development, sales and
marketing and administration.
During the second quarter of 1998, the Company initiated cost reduction
measures. Costs were primarily reduced by downsizing the Company's workforce by
approximately 20%.
Discontinued Operations
- - -----------------------
As discussed in Part 1, Item 1, the consolidated financial statements of the
Company have been restated in order to account for the operations of the GTD as
discontinued operations in view of the GTD Sale. In the restatement, all assets
and liabilities of the GTD at October 31, 1997 and December 31, 1997 and all
items of income and expense attributable to GTD's operations for all periods
presented have been eliminated from consolidation and accounted for on a net
basis as assets held for sale and discontinued operations. Accordingly, the
following discussion of the Company's financial condition and the results of
operations excludes the results of the discontinued operations, except as
otherwise indicated.
Continuing Operations Overview
- - ------------------------------
Since 1991, Base Ten, through its then existing Medical Technology Division
has been engaged in the design, development, and marketing of comprehensive
software solutions for the regulated manufacturing industries, and most
recently, computerized manufacturing execution systems for the pharmaceutical
and medical device industries. Management believes that the demand for MES in
these markets is poised for significant growth over the next few years due to
several factors. For one, there is growing pressure on the Company's customer
base to comply with regulations promulgated by the FDA, ISO 9000, and other
industry standards such as GAMP. In addition, increasing competitive influences
brought on by a) recent business combinations occurring in the customer market,
and b) the rise in purchasing power among HMOs and other benefit programs, have
underscored the need for manufacturers to be even more cost efficient.*
The Company's acquisition of certain assets from Consilium, Inc. in February
1998 broadened the Company's reach into these industries with the addition of
the FlowStream product ("BASE10(TM)FS"); a UNIX-based MES targeted at
pharmaceutical, medical device and specialty chemical customers.
The Company believes that its products are premier, standardized PC-based
systems running on Microsoft Windows-NT (BASE10(TM)ME and BASE10(TM)CS) and
HP-UX or Digital VAX/VMS (BASE10(TM)FS) with requisite functionality and
documented support required by the pharmaceutical and medical device industries
to assist in reducing costs while remaining FDA, ISO 9000, and GAMP compliant.
The Company will continue to pursue a leadership position in this market. *
The Company has received indications from customers and prospects that
compliance with industry standards is imperative to sales. As such, efforts have
been focused on compliance with certain industry standards and the Company
believes that both BASE10(TM)ME and BASE10(TM)FS are compliant with FDA, ISO
9000, and GAMP. As described above, there is a need for pharmaceutical and
medical device manufacturers to have MES products compliant with cGMP. Further,
the Company considers the additional costs of compliance with ISO 9000 and GAMP
to be prudent investments.*
Personnel are in place to address product development and enhancement, sales
and marketing, and customer support. Management believes absorbing these
expenses in advance of revenue generation is essential to facilitating market
emergence and near term growth of the Company. *
For use in a manufacturing environment, a system generally has to undergo
validation in accordance with defined procedures determining its fitness for use
in a regulated environment. The Company currently has two PHARMASYST(TM) systems
installed and validated, one at a medical device manufacturing plant and the
other at a pharmaceutical manufacturing plant. There are 14 validated
BASE10(TM)FS installations at various customer sites. One additional
PHARMASYST(TM) product and four BASE10(TM)ME products are believed to have
completed customer testing necessary for validation.
Software development expenditures are expensed as research and development
until a product attains technological feasibility. At December 31, 1998
PHARMASYST(TM) and its successor, BASE10(TM)ME had a capitalized value of $2.9
million after allowing for amortization. Development expenditures for
PHARMASYST(TM), BASE10(TM)ME and other commercial products have consisted
primarily of salaries of software engineers and quality assurance staff plus
applicable allocated overhead.
Results of Discontinued Operations
- - ----------------------------------
As discussed above, the GTD was sold on December 31, 1997, and as such its
results of operations are not included in the Company's results of operations
for fiscal year 1998. During 1997, the GTD was engaged primarily in the
development of the Interference Blanking Unit based on a contract awarded to the
GTD in May 1996. In addition, the GTD completed the development of the
Maintenance Data Recorder development contract awarded in April 1996 and
continued the development of the electronics for the SLAM-ER missile project
which the GTD was awarded in late 1996.
<PAGE>
Fiscal 1998 Compared to Fiscal 1997
- - -----------------------------------
Continuing Operations
---------------------
Revenues
--------
Company revenues increased to $7.6 million in 1998 from $2.5 million in
1997. The increase is due to an increase in license and related revenues of $1.5
million, and service and maintenance revenues of $3.5 million. Revenues for 1998
were derived 36% from licenses and related revenues, and 64% from service and
related revenues, as compared to 1997 when revenue was derived 49% from licenses
and related revenues and 51% from service and related revenues. Revenues from
FlowStream licenses, services and maintenance during 1998 accounted for $2.7
million of the $5.1 million increase in 1998.
Cost of Revenues
----------------
Cost of revenues in 1998 was $9.6 million compared with $6.4 million in
1997. Cost of revenues increased as a result of increased sales of the Company's
MES products and increased labor charges associated with the Company's increased
service and maintenance related revenues. These increased costs were partly
offset by decreased amortization of software development costs for
PHARMASYST(TM) and BASE10(TM)ME of $2.6 million in 1998 from $3.0 million in
1997.
Research and Development Costs
------------------------------
Research and development costs increased significantly in 1998 to $2.0
million from $0.1 million in 1997. This increase relates to additional personnel
and related expenses being dedicated to developing future versions of the
Company's products.
Sales and Marketing Expenses
----------------------------
The Company's sales and marketing expenses increased significantly in 1998
to $5.0 million compared with $2.7 million in 1997. The rise was mainly
attributable to salaries and related expenses resulting from the hiring of
additional personnel and increased sales commissions which resulted from
increased revenues.
General and Administrative Expenses
-----------------------------------
Company general and administrative expenses increased to $8.9 million in
1998 from $7.7 million in 1997. Costs rose primarily as a result of increases in
administrative salary and related expenses, legal, professional and consulting
fees and integration costs related to the addition of the FlowStream product
line. These increases were partly offset by a decrease of $2.4 million expense
related to the fair market value of options and warrants issued to non-employee
consultants for services rendered during 1997. The fair market value in each
year was determined using the Black-Scholes option pricing model.
Other Income and Expense
------------------------
Other expense decreased from $1.5 million in 1997 to $1.0 million in 1998.
In 1998, other expense is primarily comprised of interest expense of $1.6
million, partially offset by $0.5 million of interest income and $0.1 million of
other income. In the 1997 period, other expense was comprised of $1.6 million of
interest expense, partially offset by $0.1 million of interest income. Interest
expense remained consistent in the 1998 period as a result of similar average
levels of debt. Interest income increased in the 1998 period as a result of
higher cash balances available to earn interest. Other income increased in the
1998 period largely due to rental income earned on the sublease of building
space to Strategic, which was not present in the 1997 period, partially offset
by foreign currency exchange losses.
<PAGE>
Continuing Losses
-----------------
The Company incurred a net loss from continuing operations of $19.0 million
in 1998 compared to a $16.0 million net loss from continuing operations in 1997.
The increased loss in 1998 was largely attributable to increases in: headcount
and related expenses, legal, professional and consulting fees and integration
costs related to the addition of the FlowStream product. These increases were
partly offset by a decrease of $2.4 million expense related to the fair market
value of options and warrants issued to non-employee consultants for services
rendered during 1997.
The Company expects losses in 1999. The Company's ability to achieve
profitable operations is dependent upon, among other things, the completion of
current development and testing activities for BASE10(TM)ME and BASE10(TM)CS,
timely delivery and successful installation and validation of its systems by its
customers, and successful competition in the markets in which the Company
participates. *
Readiness for the Year 2000
- - ---------------------------
Year 2000 Issues
----------------
Generally, in today's business environment, some computers, software, and
other equipment include programming code in which calendar year data is
abbreviated to only two digits. As a result of this design decision, some of
these systems could fail to operate or fail to produce correct results if "00"
is interpreted to mean 1900, rather than 2000. This problem (the "Y2K Problem")
is widely expected to increase in frequency and severity as the year 2000
("Y2K") approaches. The Company, in anticipating Y2K, has kept the potential for
this problem in mind when purchasing new computers, software and equipment
during the past year. The Company has also considered this problem when
developing new products for sale to customers.
Company Readiness. The Y2K Problem could affect computers, software, and
other equipment used, operated, or maintained by the Company. Accordingly,
during the second quarter of 1998, the Company formed an internal Y2K committee
whose goal is to minimize any disruptions of the Company's business and to limit
the Company's liabilities resulting from the Y2K Problem. As a result, the
Company has reviewed its internal computer programs and systems, as well as the
software that the Company develops and sells to customers, to determine if the
programs and systems will be Y2K compliant.
Information Technology Systems. During the first quarter of 1998, the
Company, in anticipation of the year 2000, replaced its existing financial
accounting software system, which the Company deems to be a business-critical
system, with a system which is vendor-certified Y2K compliant.
The Company believes that it has identified substantially all of the major
computers, software applications, and related equipment used in connection with
its internal operations that must be replaced or upgraded to minimize the
possibility of a material disruption to its business. The Company presently
believes that computer systems which are not currently Y2K-compliant will be
replaced or upgraded in the normal replacement cycle prior to 2000.
Systems Other than Information Technology Systems. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, photocopiers, telephone switches, security systems, and other
common devices may be affected by the Y2K problem. The Company is currently
assessing the potential effect of, and costs of remediating, the Y2K Problem on
its office and facilities equipment, however, it currently believes that the
risk of business interruption due to this equipment is minimal.
Software Sold to Customers. The Company believes that it has substantially
identified and resolved all potential Y2K Problems with its latest MES software
release, version 2.3 of BASE10(TM)ME, as well as with version 3.4 and later
versions of BASE10(TM)FS. However, management also believes that it is not
possible to determine with complete certainty that all Y2K Problems affecting
the Company's software products have been identified or corrected due to
complexity of these products and the fact that these products interact with
other third party vendor products and operate on computer systems which are not
under the Company's control.
Certain customers have earlier versions of the Company's MES software,
PHARM2(TM) (prior to version 2.3) and PHARMASYST(TM) which have not yet been
tested by the Company for Y2K compliance. All of the customers that have
purchased these earlier versions have had substantial customization done, which
dictates that Y2K testing and modifications must be done on a case by case
basis. These customers have been notified of the Company's willingness and
ability to provide Y2K test specifications and/or manpower to help bring their
version of the Company's software into Y2K compliance. It is a small number of
customers that still operate with these earlier versions, and the Company
believes that it can bring these earlier versions of the Company's software
product into Y2K compliance without any material financial or human resources.
Also, some customers have earlier versions of BASE10(TM)FS (prior to version
3.4) which have not been tested for Y2K compliance. However, the Company has a
standard upgrade path in place for bringing all of these earlier versions into
Y2K compliance. The upgrade has been made available and customers are currently
planning the timing of when they will perform the upgrade. The Company believes
that this upgrade can be provided with minimal use of financial and human
resources, due to the standardized nature of this upgrade path.
Costs of Compliance. The Company currently believes that its computer
systems will be Y2K compliant in a timely manner, and estimates the total costs
to the Company of completing any required replacements or upgrades of these
internal systems will not have a material adverse effect on the Company's
business or results of operations, although no assurances can be given. Costs to
be incurred are expected to be immaterial and are currently estimated at less
than $100,000.
Third Party Suppliers. The Company has initiated communications with third
party suppliers of the major computers, software, and other equipment used,
operated, or maintained by the Company to identify and, to the extent possible,
to resolve issues involving the Y2K Problem. While the majority of the Company's
significant suppliers are software industry leaders and have committed to
upgrades to resolve any Y2K Problems, the Company has limited or no control over
the actions of these third party suppliers. Thus, while the Company expects that
it will be able to resolve any significant Y2K Problems with these systems,
there can be no assurance that these suppliers will resolve any or all Y2K
Problems with these systems before the occurrence of a material disruption to
the business of the Company or any of its customers. Any failure of these third
parties to resolve Y2K Problems with their systems in a timely manner could, but
is not currently expected to, have a material adverse effect on the Company's
business, financial condition, and results of operations.
Most Likely Consequences of Year 2000 Problems. The Company expects to
identify and resolve all Y2K Problems that could have a material adverse effect
on its business operations prior to the year 2000. However, management believes
that it is not possible to determine with complete certainty that all Y2K
Problems affecting the Company will be identified or corrected. It is not
possible to accurately predict how many Y2K Problem-related failures will occur
or the severity, duration, or financial consequences of these perhaps inevitable
failures. As a result, management expects that the Company, under a worst-case
scenario, could suffer the following consequences: (a) a significant number of
operational inconveniences and inefficiencies for the Company and its clients
that may divert management's time and attention and financial and human
resources from its ordinary business activities; and (b) a small number of
serious system failures related to older versions of the Company's
PHARMASYST(TM) and PHARM2(TM) products that may require significant efforts by
the Company and/or its customers to prevent or alleviate material business
disruptions.
Contingency Plans. The Company is currently developing contingency plans to
be implemented as part of its effort to identify and correct Y2K Problems that
may affect its internal systems, software and third party suppliers. The Company
currently expects to complete its contingency plans during mid-1999. Depending
on the systems affected, these plans could include accelerated replacement of
affected third party equipment or software (the timing of which would occur in
the third quarter of 1999), the hiring of additional personnel and/or increased
work hours for Company personnel to correct, on an accelerated schedule, any Y2K
Problems that arise with the earlier versions of PHARMASYST(TM) and PHARM2(TM)
software sold to customers, and/or similar approaches to any Y2K Problems that
may occur. If the Company is required to implement any of these contingency
plans, it could, but is not currently expected to, have a material adverse
effect on the Company's financial condition and results of operations.
Based on the Company's current analysis of the Y2K Problem, as described
above, the Company does not believe that the Y2K Problem will have a material
adverse effect on the Company's business or results of operations.
Disclaimer. The discussion of the Company's efforts, and management's
expectations, relating to Y2K compliance are forward-looking statements. The
Company's ability to achieve Y2K compliance and the level of incremental costs
associated therewith, could be adversely impacted by, among other things, the
resources needed to bring older versions of the Company's PHARMASYST(TM) and
PHARM2(TM) software into Y2K compliance, the third-party supplier's ability to
modify its proprietary software, and unanticipated problems identified in the
ongoing compliance review.
<PAGE>
Fiscal 1997 Compared to Fiscal 1996
- - -----------------------------------
Continuing Operations
---------------------
Revenues
--------
Company revenues in 1997 increased to $2.5 million compared with $1.3
million in 1996 due to increases in deliveries of the then PHARM2(TM)product.
Cost of Revenues
----------------
Cost of revenues in 1997 was $6.4 million compared with $4.4 million in
1996. Cost of revenues increased due to labor and overhead component cost of
inventory increases primarily due to additional software development and test
personnel in both the New Jersey and United Kingdom facilities. Amortization of
software development costs for PHARMASYST(TM) and BASE10(TM)ME increased from
$1.3 million in 1996 to $3.0 million in 1997. Also, in 1996, the Company wrote
off a $2.4 million balance of capitalized costs related to its non-MES products,
PRENVAL and uPACS, upon concluding that sufficient revenues and cash flows would
not be generated to recover the capitalized costs for either product.
Research and Development Costs
------------------------------
Research and development costs decreased from $0.4 million in 1996 to $0.1
million in 1997, as most resources were utilized for completion and maintenance
of current versions of the Company's software during 1997.
Sales and Marketing Expenses
----------------------------
Sales and marketing costs increased from $2.0 million in 1996 to $2.7
million in 1997 due partially to an increase of $0.3 million in consulting fees
and increases in sales commissions and personnel costs.
General and Administrative Expenses
-----------------------------------
General and administrative expenses in 1997 were $7.7 million compared with
$3.1 million in 1996. There were increases in almost all general and
administrative expense categories, the largest of which was inclusion of a
non-cash expense of $2.7 million which represents the fair market value of
options and warrants issued to non-employee consultants for service rendered
during fiscal 1997. The fair market value was determined using the Black-Scholes
option pricing model.
Other Income and Expense
------------------------
Other expense in 1997 was $1.5 million compared to $0.4 million in 1996, and
was comprised of interest expense of $1.6 million and $0.7 million,
respectively, offset partially by interest and other income of $0.1 million and
$0.3 million, respectively. The increase in interest expense was related to
interest on the $10 million convertible debenture issued in 1996 and the $5.5
million convertible debenture issued in 1997. The $10 million convertible
debenture, which had an annual interest rate of 9.01%, was outstanding for less
than three months in 1996 compared with a full year in 1997. The $5.5 million
convertible debenture, issued in 1997 with an annual interest rate of 8%, was
outstanding for five months in 1997.
Continuing Losses
-----------------
The Company incurred a loss from continuing operations before taxes of $16.0
million in 1997 compared to $9.1 million in 1996. The 1996 loss was reduced to
$8.4 million by an income tax benefit of $.7 million. A major portion of the
loss in 1997 compared to 1996 was attributable to the $1.7 million increased
amortization, as well as certain cost overruns and related penalties of $1.0
million, and the $2.7 million expense related to the fair market value of
options and warrants issued to non-employee consultants for services rendered
during 1997. The increases in labor and overhead costs and interest expense also
contributed to the loss.
The 1996 loss included 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 of uPACS as
well as other operating losses including interest and amortization of $ 2.0
million. The major portion of the operating loss represented the Company's
continuing investment in the development of markets and infrastructure for the
MES business.
Discontinued Operations
-----------------------
The GTD incurred a net loss of $6.0 million in 1997 compared to a net loss
of $0.5 million in 1996. The GTD loss in 1997 consisted primarily of operating
losses incurred because of reduced revenues without the corresponding reduction
in operating expenses, and, a loss of $1.2 million on the GTD Sale.
GTD revenues in 1997 were $10.0 million compared with $13.3 million in 1996.
The decrease in revenues was directly attributable to the difficulty in
obtaining new business due to delays in government procurement and stretched out
deliveries of existing programs. The GTD cost of sales in 1997 was $9.3 million
compared with $10.3 million in 1996. Selling, general and administrative
expenses for 1997 were $4.1 million compared with $3.4 million in 1996.
Liquidity and Capital Resources
- - -------------------------------
Company working capital increased to $15.5 million at fiscal year end
December 31, 1998 from $6.1 million at December 31, 1997. The Company had $17.4
million of cash and cash equivalents at December 31, 1998, up from $9.1 million
at December 31, 1997. The increase in cash during the fiscal year ended December
31, 1998 resulted from the realization of capital provided from financing
activities of $28.9 million, partially offset by the use of cash in operations
of $17.1 million, the use of cash in investing activities of $3.4 million.
In 1998 cash used in operations has been affected primarily by the net loss
of $19.0 million, an increase of $0.8 million in accounts receivable and a
reduction of $0.8 million in accounts payable and accrued expenses. These uses
of cash have been partially offset by amortization and depreciation of $3.3
million and non-cash compensation expense resulting from issuance of stock
options and warrants of $0.3 million, included in the aforementioned net loss
amount.
Investing activities in 1998 have been comprised primarily of the
acquisition of assets related to the FlowStream product of approximately $2.1
million, additions to plant and equipment of $0.6 million and additions to
capitalized software of $0.7 million.
Cash from financing activities for 1998 resulted primarily from two
transactions: (i) the net receipt in January 1998 of $9.4 million related to the
second installment of an investment by the Company's Series A Redeemable
Convertible Preferred Stockholders which had been finalized in December 1997,
and (ii) the November 13, 1998 sale and issuance of 6,666,666 shares of Class A
Common Stock for net proceeds of $18.8 million. Refer to Note N to the
Consolidated Financial Statements for further discussion of these transactions.
The Company's financial statements have been prepared on the basis that
it will continue as a going concern. The Company has incurred significant
operating losses and negative cash flows in recent years. Also, at December 31,
1998 the Company was below the $4 million minimum net tangible assets, as
defined, required for its current listing on the NASDAQ National Market System.
In March 1999, the Company's shareholders' equity was increased by approximately
$9.6 million through the conversion of its $10 million convertible debenture
into common stock. Coincident with that debt conversion, the Company's Series A
Redeemable Convertible Preferred Stock was converted into Series B Redeemable
Convertible Preferred Stock. These Preferred Stocks have certain Redemption
Events, which if such events occurred, would provide the holder with the right
to require the Company to purchase their shares for cash which would adversely
affect the Company. (See Note N to the Consolidated Financial Statements.)
Accordingly, where these rights exist such Redeemable Securities are categorized
outside of shareholders' equity and, thus, do not qualify as equity for the
purposes of the NASDAQ minimum net tangible asset requirement. Also, security
holders may have other rights/claims in connection with the March 1999
transactions described above.
To further increase the Company's net tangible assets and in order to
help further ensure the Company's compliance with NASDAQ listing requirements,
management is in the process of negotiating with participants in the March 1999
debt conversion and Preferred Stock exchange to obtain waivers of any redemption
or recession rights. These waivers, if obtained, would eliminate the holders'
cash redemption rights. This would qualify all related securities for
classification in permanent stockholders' equity and increase the Company's
qualifying net tangible assets. If such waivers are obtained, then management
believes that the Company's current liquidity would be sufficient to meet its
cash needs for its existing business through fiscal 1999. However, there can be
no assurance that management's efforts in this regard will be successful.
If management is not successful in obtaining such waivers, and it
continues to incur operating losses it could fall below the minimum net asset
requirement needed to qualify for ongoing listing on NASDAQ. Management's plans
in this case include, among other things, attempting to improve (i) operating
cash flow through increased license sales and service revenue, and (ii)
increasing the level of anticipated streamlining of its selling, administration
and development functions. However there is no assurance that such plans, if
implemented, will be sufficient. Further, recently there have been announcements
of potential changes in senior management, which increase the uncertainty of
whether existing management plans will be executed.
Also, the Company is considering certain significant acquisitions which
depending on net liabilities assumed, if any, and on the success of cost
reduction efforts to bring the acquisitions to break-even, may require
additional funding. (See Note U to the Consolidated Financial Statements.)
However, there can be no assurance that such acquisitions will occur, or whether
additional funds required, if any, would be available to Base Ten.
If current cash and working capital reduced by cash used in operations in
1999 is not sufficient to satisfy the Company's liquidity and minimum net
tangible asset requirements, the Company will seek to obtain additional equity
financing. Additional funding may not be available when needed or on terms
acceptable to the Company. If the Company were required to raise additional
financing for the matters described above and/or to continue to fund expansion,
develop and enhance products and service, or otherwise respond to competitive
pressures, there is no assurance that adequate funds will be available or that
they will be available on terms acceptable to the Company. Such a limitation
could have a material adverse effect on the Company's business; financial
condition or operations and the financial statements do not include any
adjustment that could result therefrom.
During 1998 the Company eliminated $5.5 million of long-term debt as the
convertible debenture holders converted these $5.5 million, 8.0% debentures into
1,490,805 shares of Class A Common Stock. Subsequent to year end, on March 5,
1999, the holder of the $10 million, 9.01% convertible debenture converted this
debenture into 2,500,000 shares of Class A Common Stock which increased
shareholders' equity by approximately $9.6 million including a non-cash charge
of approximately $5.5 million. As a result of these debenture conversions, the
Company will realize an annual interest expense savings of approximately $1.3
million. For further discussion of these debentures see Note L to the
Consolidated Financial Statements.
On November 10, 1998, the shareholders approved the sale and issuance of
Series B Convertible Preferred Stock (subject to the execution of definitive
agreements) and the issuance of Class A Common Stock Purchase Warrants to the
Series A Convertible Preferred Stockholders that would receive Series B
Convertible Preferred Stock. The sale and issuance of Series B Convertible
Preferred Stock ("Series B Preferred Shares") to the Series A Convertible
Preferred Stockholders occurred in March 1999 and was in the form of an even
exchange for Series A Convertible Preferred Stock ("Series A Preferred Shares").
The terms of the Series B Preferred Shares are similar to the Series A Preferred
Shares, except that: (a) the Series B Preferred Shares have a conversion price
of that number of shares determined by dividing the Mandatory Redemption Price
by $4.00, as defined in the Series A Preferred Stock Agreement, whereas the
conversion price of the Series A Preferred Shares was equal to the lesser of (i)
$16.25 or (ii) the Weighted Volume Average Price (as defined) of the Class A
Common Stock prior to the conversion date limited to 3,040,000 shares; (b) the
Series B Preferred Shares, as a result of the conversion price of $4.00,
does not provide the holder with the option to receive a subordinated 8%
promissory note, as the Series A Preferred Shares provides; and (c) there will
be no dividend payment due based on the price of the Class A Common Stock, as
the Series A Preferred Shares provides. As a result of the exchange of Series A
Preferred Shares for Series B Preferred Shares, preferred stock dividends are no
longer required to be paid by the Company.
The issuance of Class A Common Stock Purchase Warrants to the Series A
Preferred Stockholders that received Series B Preferred Shares provided for the
issuance of 80,000 Class A Common Stock Purchase Warrants for each $1 million of
principal amount of the Series A Preferred Shares outstanding on November 10,
1998 in addition to certain other Series A Preferred Shares which were converted
at $4.00 per share between September 1, 1998 and November 10, 1998. These
purchase warrants are four-year warrants exercisable at $3.00, and provide for
mandatory exercise upon the occurrence of certain events.
During 1998, 5,798 shares of Series A Convertible Preferred Stock were
converted to 1,917,806 shares of Class A Common Stock.
Subsequent to year-end, on March 5, 1999, the outstanding shares of Series A
Convertible Preferred Stock were exchanged for Series B Convertible Preferred
Stock.
For further discussion of the Series A and B Preferred Shares and Common
Stock see Note N and Note O to the Consolidated Financial Statements.
As discussed elsewhere in this Annual Report on Form 10-K, the Company is
a 9% shareholder in uPACS LLC, a limited liability company which has developed a
system for archiving ultrasound images with networking, communication and
off-line measurement capabilities. During the fourth quarter of 1998, the
Company determined that it did not have the required resources to devote to both
its core manufacturing execution software business and the uPACS(TM) business,
and as a result, initiated a search for a potential buyer of the LLC and its
technology. At December 31, 1998, the LLC had substantially exhausted its
capital resources and, as of the filing date of this annual report on Form 10-K,
a buyer had not yet been located. The Company currently intends to fund the LLC
operation during the search for a buyer. The Company anticipates such
contributions to total $500,000.
On March 16, 1999, the Company's Board of Directors agreed to proceed with
negotiations with the acquisition of Almedica Technology Group (Almedica), a
wholly owned subsidiary of Almedica International, Inc. in a stock transaction.
Almedica develops clinical label and materials management software for the
pharmaceutical industry essential to the management of clinical trials. The
acquisition, which is subject to the negotiation of final terms and related
execution of a definitive agreement, is expected to close before the end of May
1999. The Company currently anticipates cash outlays related to this acquisition
of Almedica to be approximately $0.5 - $1.0 million for fiscal 1999. * See Note
U to the Consolidated Financial Statements for more information.
On March 16, 1999, the Company's Board of Directors approved the commencment
of preliminary discussions which could lead to an acquisition of Select Software
Tools, plc (NASDAQ: SLCTY) (Select) in a stock transaction. Also, in
connection with these preliminary discussions with Select, the Company agreed to
loan Select up to $1.0 million. The acquisition is subject to the negotiation of
final terms and execution of a definitive purchase agreement, and the approval
of Select stockholders. On March 26, 1999, the Company loaned $0.7 million to
Select under a promissory note. If the Select acquisition occurs, the Company
currently expects cash outlays related to the acquisition of Select to be
approximately $5 million for fiscal 1999, including the $0.7 million loan. *
The Company believes that Select took certain restructuring actions in the
second half of 1998 and early 1999 in an effort to significantly reduce its
expense base. The Company and Select have initially identified additional cost
reductions which are intended to bring Select to break-even by closing or
shortly after the date of acquisition by Base Ten. If the Select acquisition
occurs, depending on net liabilities of Select assumed by the Company at the
date of acquisition, if any, and on the success of these cost reduction efforts,
in bringing Select to net positive cash flow, the Company may need to acquire
additional funding in 1999.* See Note U to the Consolidated Financial Statements
for more information.
The Company is currently evaluating its selling, administrative and
development functions with the intention of further streamlining operations and
reducing operating expenses. The Company anticipates that decisions based on
this evaluation will be made in the first half of 1999. Ensuing actions may
result in certain nonrecurring charges during 1999; the extent of such charges
is not yet quantifiable.
Possible Change Of Control. On March 17, 1999, Drew Sycoff, a principal of
Andrew Garrett & Company, suggested to Thomas E. Gardner, the Chief Executive
Officer of the Company, on behalf Mr. Sycoff's clients, including Jesse
Upchurch, the beneficial owner of more than 40% of the combined voting power of
the Company, that Mr. Gardner should consider resigning and that if he were to
resign, that Mr. Sycoff would be able to negotiate a transition. In a subsequent
conversation on the same day, Mr. Gardner offered Mr. Sycoff an opportunity to
present his viewpoints to the Board of Directors and offered to call a special
meeting of the Board if Mr. Sycoff wanted an early meeting. Mr. Sycoff indicated
that the matter was not urgent and such presentation, if one were to be made,
could wait at least until after the annual meeting of shareholders which was
then anticipated to be held in May, 1999. On April 1, 1999, at a meeting of the
board of directors of the Company, the board gave to Mr. Gardner its unqualified
continuing support. However, on April 2, 1999 Mr. Sycoff, on behalf of his
clients, demanded Mr. Gardner's resignation, and the resignations of the entire
board of directors. Mr. Sycoff also indicated that unless the Board of Directors
resigned before the annual meeting of shareholders, he would, on behalf of the
shareholders whom he represented, commence a proxy contest with respect to the
annual election of directors. The Company does not yet know the impact, if any,
that such change in control would have on the Company's ability to consummate
the Almedica acquisition or on the preliminary discussions regarding Select.
The Company is relying on its leading products, BASE10(TM)ME, BASE10(TM)CS
and BASE10(TM)FS to stimulate new orders. Neither the additional development of
the Company's MES products nor the consequential generation of cash can be
assured, either in time or amount, nor is there any assurance that such amounts
will be sufficient for the Company's needs. In the absence of such orders or the
promise thereof, neither of which can be assured, as well as in connection with
its expected capital needs for the year 2000 and beyond, the Company may elect
to seek additional sources of capital and may also elect to reduce the pace of
its development of its products and/or establish other cost reduction measures,
which could adversely impact the Company. In the event the Company elects to
seek additional capital there can be no assurance that such funds or capital
would be available on the terms or in the amounts needed. *
<PAGE>
Item 8. Financial Statements and Supplementary Data
- - ----------------------------------------------------
<TABLE>
<CAPTION>
Index to Financial Statements
Page
<S> <C>
Report of Independent Accountants....................................................................... F-1
Independent Auditors' Report............................................................................ F-2
Consolidated Balance Sheets - December 31, 1998, December 31, 1997 and October 31, 1997 ................ F-3
Consolidated Statements of Operations - Years ended December 31, 1998 and October 31, 1997 and
1996 and the Two Month Transition Period from November 1, 1997 through December 31, 1997............. F-4
Consolidated Statements of Shareholders' Equity (Deficiency) - Years ended December 31, 1998 and
October 31, 1997 and 1996 and the Two Month Transition Period from November 1, 1997 through
December 31, 1997.................................................................................... F-5
Consolidated Statements of Cash Flows - Years ended December 31, 1998 and October 31, 1997
and 1996 and the Two Month Transition Period from November 1, 1997 through December 31, 1997........ F-7
Notes to Consolidated Financial Statements.............................................................. F-8
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- - -------------------------------------------------------------------------
On March 13, 1998, the Company engaged PricewaterhouseCoopers LLP,
("PricewaterhouseCoopers") independent certified public accountants, as the
Company's auditors for the 1998 fiscal year. During the Company's two most
recent fiscal years and the subsequent interim period preceding March 13, 1998,
neither the Company (nor anyone acting on the Company's behalf) consulted with
PricewaterhouseCoopers regarding the application of accounting principles to a
specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Company's financial statements, and
neither a written report nor oral advice was provided to the Company by
PricewaterhouseCoopers; or matters which would require disclosure pursuant to
Items 304(a)(1)(iv) and 304(a)(1)(v) of Regulation S-K.
On March 3, 1998, the Company dismissed Deloitte & Touche LLP
("Deloitte & Touche") as the principal accountant to audit the Registrant's
financial statements. The reports of Deloitte & Touche on the Company's
financial statements for the past two fiscal years did not contain an adverse
opinion or a disclaimer of opinion, nor were such reports qualified or modified
as to uncertainty, audit scope or accounting principles. The decision to dismiss
Deloitte & Touche was approved by the Company's Board of Directors.
During the two most recent fiscal years and the subsequent interim
period preceding March 3, 1998, there were no disagreements with Deloitte &
Touche on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which, if not resolved to Deloitte &
Touche's satisfaction, would have caused Deloitte & Touche to make reference to
the subject matter of the disagreement in connection with its report. During the
two most recent fiscal years and the subsequent interim period preceding March
3, 1998, Deloitte & Touche did not advise the Company of any matters set forth
in Item 304(a)(1)(v) of Regulation S-K. Deloitte & Touche furnished the Company
with a letter addressed to the Securities and Exchange Commission stating that
it agreed with this disclosure, which was filed as an exhibit to the Company's
Current Report on Form 8-K, dated March 3, 1998.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
- - ------------------------------------------------------------
Information concerning the Company's executive officers is set forth in Part
I, Item 1, under the caption "Executive Officers," and is incorporated herein by
reference. The information called for by Item 10 concerning the Company's
directors will be included in the Company Proxy Statement for its 1999 Annual
Meeting of Shareholders, under the caption, "Election of Directors," and is
incorporated herein by reference.
Item 11. Executive Compensation
- - --------------------------------
The information called for by Item 11 concerning Executive Compensation will
be included in the Company's Proxy Statement for its 1999 Annual Meeting of
Shareholders, under the caption, "Executive Compensation," and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- - ------------------------------------------------------------------------
The information called for by item 12 concerning beneficial ownership of
certain beneficial owners and management will be included in the Company's Proxy
Statement for its 1999 Annual Meeting of Shareholders, under the caption,
"Security Ownership of Certain Beneficial Owners and Management," and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
- - ---------------------------------------------------------
The information called for by Item 13 concerning certain relationships and
related transactions will be included in the Company's Proxy Statement for its
1999 Annual Meeting of Shareholders under the caption, "Certain Transactions
with Related Parties," and is incorporated herein by reference.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K
- - ----------------------------------------------------------------
(a) Financial Statements and Schedules:
1. Financial Statements: The Financial Statements listed in the Index
under Item 8 are included in this Annual Report at the pages
indicated.
2. Financial Statement Schedules: The financial statement schedules
for which provision is made in Regulation S-X have been omitted
because the required information is either presented in the
Financial Statements or the Notes thereto or is not applicable.
3. Exhibits: See the Exhibit Index on pages 38 through 40 of this
Annual Report.
(b) Reports on Form 8-K: The Company filed a Current Report on Form
8-K, on November 20, 1998, for the sale of 6,666,666 shares of its
Class A Common Stock at a purchase price of $3.00 per share for
aggregate proceeds of $20,000,000.
<PAGE>
Report of Independent Accountants
The Board of Directors and Shareholders
Base Ten Systems, Inc.
Trenton, New Jersey 08619
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Base Ten Systems, Inc. and its subsidiaries at December
31, 1998 and December 31, 1997 and the results of their operations and cash
flows for the year ended December 31, 1998 and the two-months ended December 31,
1997 in conformity with generally accepted accounting principles. 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 which 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, assessing the
accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion expressed above. The financial
statements of Base Ten Systems, Inc., and its subsidiaries for the years
ended October 31, 1997 and 1996 were audited by other independent accountants
whose report dated February 6, 1998 expressed an unqualified opinion on those
statements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has suffered recurring losses from operations
and has redeemable preferred stock that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note A. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
April 12, 1999
See Notes to the Consolidated Financial Statements
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Base Ten Systems, Inc.
Trenton, New Jersey 08619
We have audited the consolidated balance sheets of Base Ten Systems, Inc.
and subsidiaries as of October 31, 1997 and the related consolidated statements
of operations, shareholders' equity (deficiency) and cash flows for each of the
years in the period ended October 31, 1997 and 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, 1997 and the results of their
operations and their cash flows for each of the years in the period ended
October 31, 1997 and 1996 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 6, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
Base Ten Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except par value)
Assets
December 31, December 31, October 31,
1998 1997 1997
--------------- ------------------- ------------------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents......................................... $17,437 $ 9,118 $ 1,502
Accounts receivable, net.......................................... 2,372 1,583 1,808
Net assets held for sale.......................................... - - 5,338
Other current assets.............................................. 639 530 1,044
--------------- ------------------- ------------------
Total Current Assets........................................ 20,448 11,231 9,692
--------------- ------------------- ------------------
Property, plant and equipment, net................................... 5,026 4,346 4,305
Note receivable...................................................... 1,975 1,975 -
Other assets......................................................... 6,372 6,861 7,220
--------------- ------------------- ------------------
Total Assets $33,821 $24,413 $21,217
=============== =================== ==================
<CAPTION>
Liabilities, Redeemable Convertible Preferred Stock, and Shareholders' Equity (Deficiency)
<S> <C> <C> <C>
Current Liabilities:
Accounts payable.................................................. $ 984 $ 282 $ 962
Accrued expenses.................................................. 3,152 4,106 5,653
Deferred revenue.................................................. 756 709 352
Current portion of financing obligation........................... 74 54 54
--------------- ------------------ -------------------
Total Current Liabilities................................... 4,966 5,151 7,021
--------------- ------------------ -------------------
Long-Term Liabilities:
Long-term debt.................................................... 10,000 15,500 15,500
Financing obligation.............................................. 3,341 3,416 3,425
Other long-term liabilities....................................... 228 245 253
--------------- ------------------ -------------------
Total Long-Term Liabilities................................. 13,569 19,161 19,178
--------------- ------------------ -------------------
<PAGE>
Base Ten Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except par value)
Assets
<CAPTION>
December 31, December 31, October 31,
1998 1997 1997
--------------- ------------------- ------------------
<S> <C> <C> <C>
Commitments and Contingencies - (Note K)
Redeemable Convertible Preferred Stock
Series A Preferred Stock, $1.00 par value, 997,801 shares
authorized; issued and outstanding 14,942 shares at
December 31, 1998 and 9,375 shares at December 31, 1997;
aggregate liquidation value of $14,942
at December 31, 1998.......................................... 12,914 14,684 -
Less: Subscription Receivable....................................... - (8,529) -
--------------- ------------------ -----------------
12,914 6,155 -
Shareholders' Equity (Deficiency)
Class A Common Stock, $1.00 par value,
60,000,000 shares authorized;
issued and outstanding 18,659,748 shares at
December 31, 1998; 7,828,719 shares at December 31, 1997,
and 7,768,952 shares at October 31, 1997...................... 18,660 7,829 7,769
Class B Common Stock, $1.00 par value, 2,000,000 shares
authorized; issued and outstanding 71,410 shares
at December 31, 1998 and 445,121 shares at
December 31, 1997 and October 31, 1997........................ 71 445 445
Additional paid-in capital....................................... 52,885 32,388 29,458
Accumulated Deficit.............................................. (68,767) (46,583) (42,647)
--------------- ------------------ ------------------
2,765 (5,921) (4,975)
Accumulated other comprehensive income (loss).................... (196) (133) (7)
Treasury Stock, 100,000 Class A Common Shares, at cost........... (282) - -
--------------- ------------------ ------------------
Total Shareholders' Equity (Deficiency).................... 2,372 (6,054) (4,982)
--------------- ------------------ -------------------
Total Liabilities, Redeemable Convertible Preferred Stock,
and Shareholders' Equity (Deficiency).................. $ 33,736 $ 24,413 $ 21,217
=============== ================== ===================
</TABLE>
See Notes to the Consolidated Financial Statements
F-3
<PAGE>
<TABLE>
<CAPTION>
Base Ten Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(dollars in thousands, except per share data)
Two
Year ended months ended Year ended Year ended
December 31, December 31, October 31, October 31,
1998 1997 1997 1996
------------ ------------ -------------- -----------
<S> <C> <C> <C> <C>
License and related revenue................................ $ 2,727 $ -- $ 1,221 $ 454
Services and related revenue............................... 4,823 181 1,291 808
------------ ------------ ------------- -------------
7,550 181 2,512 1,262
Cost of revenues........................................... 9,639 1,457 6,387 4,423
Research and development................................... 2,002 25 147 404
Selling and marketing...................................... 5,003 569 2,736 2,049
General and administrative................................. 8,944 1,647 7,743 3,073
------------ ------------ ------------- -------------
25,588 3,698 17,013 9,949
------------ ------------ ------------- -------------
Loss from continuing operations before other income (expense) and
income tax benefit...................................... (18,107) (3,517) (14,501) (8,687)
------------ ------------ ------------- -------------
Other income (expense), net................................ (982) (197) (1,479) (410)
------------ ------------ ------------- -------------
Loss from continuing operations before income tax benefit.. (19,020) (3,714) (15,980) (9,097)
------------ ------------ ------------- -------------
Income tax benefit......................................... -- -- -- 684
------------ ------------ ------------- -------------
Net loss from continuing operations........................ (19,020) (3,714) (15,980) (8,413)
------------ ------------ ------------- -------------
Discontinued operations:
Loss from operations of Government Technology Division, net of
income tax benefit of $363 in 1996...................... -- (222) (4,854) (546)
Loss on sale............................................... -- -- (1,173) --
------------ ------------ ------------- -------------
Loss from discontinued operations.......................... -- (222) (6,027) (546)
------------ ------------ ------------- -------------
Net loss................................................... $ (19,020) $ (3,936) $ (22,007) (8,959)
============ ============ ============= =============
Less: Dividends on Redeemable Convertible
Preferred Stock.................................... (1,740) -- -- --
Accretion on Redeemable Convertible
Preferred Stock.................................... (1,424) -- -- --
------------ ------------ ------------- -------------
Net loss available for common shareholders................. $ (22,184) $ (3,936) $ (22,007) (8,959)
============ ============ ============= =============
Basic and diluted loss per share:
Continuing operations...................................... $ (2.09) $ (0.45) $ (2.03) $ (1.09)
Discontinued operations.................................... -- (0.03) (0.76) (0.07)
------------ ------------ ------------- -------------
Net loss per share......................................... $ (2.09) $ (0.48) $ (2.79) $ (1.16)
============ ============ ============= =============
Weighted average common shares outstanding -
basic and diluted........................................ 10,618,000 8,258,000 7,895,000 7,743,000
============ ============ ============= =============
</TABLE>
See Notes to the Consolidated Financial Statements
F-4
<PAGE>
Base Ten Systems, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity (Deficiency)
(dollars in thousands)
<TABLE>
<CAPTION>
Class A Class B Additional
Common Stock Common Stock Paid-In
Shares Amount Shares Amount Capital
- - -------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance
October 31, 1995 .............. 7,216,195 $ 7,216 458,474 $ 458 $ 24,410
Conversions:
Common B to
Common A .................. 5,418 5 (5,418) (5) --
Exercise of options ........... 137,351 138 -- -- 676
Retirement of
treasury stock ................ -- -- (7,669) (8) --
Comprehensive
Income (Loss):
Net loss .................. -- -- -- -- --
Foreign currency
translation ............... -- -- -- -- --
Unrealized gain on
securities available
for sale .................. -- -- -- -- --
Total Comprehensive
Income (Loss):.................
=============================== ========== ========== ============ ============ ==========
Balance
October 31, 1996 .............. 7,358,964 7,359 445,387 445 25,086
=============================== ========== ========== ============ ============ ==========
=============================== ========== ========== ============ ============ ==========
Conversions:
Common B to
Common A .................. 266 -- (266) -- --
Exercise of
options ....................... 93,230 93 -- -- 506
Exercise of
warrants ...................... 305,000 305 -- -- 1,017
Issuance of
Common Stock:
Interest payments ......... 11,492 12 -- -- 99
Compensation
related to warrants
and options issuance .......... -- -- -- -- 2,750
Comprehensive
Income (Loss):
Net loss .................. -- -- -- -- --
Foreign currency
translation ............... -- -- -- -- --
Unrealized gain on
securities available
for sale .................. -- -- -- -- --
Total
Comprehensive Income (Loss):... -- -- -- -- --
<PAGE>
=============================== ========== ========== ============ ============ ==========
Balance
October 31, 1997 .............. 7,768,952 7,769 445,121 445 29,458
=============================== ========== ========== ============ ============ ==========
=============================== ========== ========== ============ ============ ==========
Exercise of options ........... 50,584 51 -- -- 445
Issuance of
Common Stock:
Interest payments ......... 9,183 9 -- -- 102
Common Stock Warrants,
net of subscription
receivable of $851 ............ -- -- -- -- 1,840
Compensation related to
warrants and options issuance.. -- -- -- -- 543
Comprehensive
Income (Loss):
Net loss .................. -- -- -- -- --
Foreign currency
translation ............... -- -- -- -- --
Unrealized loss on
securities available
for sale .................. -- -- -- -- --
Total Comprehensive
Income (Loss): ................ -- -- -- -- --
=============================== ========== ========== ============ ============ ==========
Balance at
December 31, 1997 ............. 7,828,719 $ 7,829 445,121 $ 445 $ 32,388
=============================== ========== ========== ============ ============ ==========
<PAGE>
<CAPTION>
Accumulated
Other Total
Accumulated Comprehensive Treasury Stock Shareholders'
Deficit Income (Loss) Shares Amount Equity
<S> ------------ ------------- ----------- ------------ ------------
<C> <C> <C> <C> <C>
Balance
October 31, 1995 .............. $ (11,681) $ (142) -- $ -- $ 20,261
Conversions:
Common B to
Common A .................. -- -- -- -- --
Exercise of options ........... -- -- -- (8) 806
Retirement of
treasury stock ................ -- -- -- 8 --
Comprehensive
Income (Loss):
Net loss .................. (8,959) -- -- -- (8,959)
Foreign currency
translation ............... -- (17) -- -- (17)
Unrealized gain on
securities available
for sale .................. -- 49 -- -- 49
Total Comprehensive
Income (Loss):................. -- -- -- -- (8,927)
=============================== ============ ========== =========== ============ ==========
Balance
October 31, 1996 .............. (20,640) (110) -- -- 12,140
=============================== ============ ========== =========== ============ ==========
=============================== ============ ========== =========== ============ ==========
Conversions:
Common B to
Common A .................. -- -- -- -- --
Exercise of
options ....................... -- -- -- -- 599
Exercise of
warrants ...................... -- -- -- -- 1,322
Issuance of
Common Stock:
Interest payments ......... -- -- -- -- 111
Compensation
related to warrants
and options issuance .......... -- -- -- -- 2,750
Comprehensive
Income (Loss):
Net loss .................. (22,007) -- -- -- (22,007)
Foreign currency
translation ............... -- 9 -- -- 9
Unrealized gain on
securities available
for sale .................. -- 94 -- -- 94
Total
Comprehensive Income (Loss):... -- -- -- -- (21,904)
=============================== ============ ========== =========== ============ ==========
Balance
October 31, 1997 .............. (42,647) (7) -- -- (4,982)
=============================== ============ ========== =========== ============ ==========
=============================== ============ ========== =========== ============ ==========
Exercise of options ........... -- -- -- -- 496
Issuance of
Common Stock:
Interest payments ......... -- -- -- -- 111
Common Stock Warrants,
net of subscription
receivable of $851 ............ -- -- -- -- 1,840
Compensation related to
warrants and options issuance.. -- -- -- -- 543
Comprehensive
Income (Loss):
Net loss .................. (3,936) -- -- -- (3,936)
Foreign currency
translation ............... -- (45) -- -- (45)
Unrealized loss on
securities available
for sale .................. -- (81) -- -- (81)
Total Comprehensive
Income (Loss):................. -- -- -- -- (4,062)
=============================== ============ ========== =========== ============ ==========
Balance at
December 31, 1997 ............. $ (46,583) $ (133) -- $ -- $ (6,054)
=============================== ============ ========== =========== ============ ==========
</TABLE>
See Notes to the Consolidated Financial Statements
F-5
<PAGE>
<TABLE>
<CAPTION>
Base Ten Systems, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity (Deficiency) (con't)
(dollars in thousands)
Class A Class B
Common Stock Common Stock
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Balance
at December 31, 1997 ..... 7,828,719 $ 7,829 445,121 $ 445
========================== ========== ========== ========== ==========
Conversions:
Common B to
Common A ............. 567,980 568 (378,657) (379)
Preferred A to
Common A ............. 1,917,806 1,918 -- --
Debenture to
Common A ............. 1,490,805 1,491 -- --
Exercise of options ...... 150,232 150 4,946 5
Issuance of
Common Stock:
Private placement .... 6,666,666 6,666 -- --
Interest payments .... 30,755 31 -- --
Employee stock
purchase plan ........ 6,785 7 -- --
Compensation related
to warrants and
options issuance ......... -- -- -- --
Dividends on
Redeemable Preferred
Stock .................... -- -- -- --
Accretion on
Redeemable Preferred
Stock .................... -- -- -- --
Collection of Common
Stock Warrants
Subscription Receivable .. -- -- -- --
Treasury stock
purchase ................. -- -- -- --
Comprehensive
Income (Loss):
Net loss ............. -- -- -- --
Foreign currency
translation .......... -- -- -- --
Unrealized gain on
securities available
for sale ............. -- -- -- --
Total Comprehensive
Income (Loss):............ -- -- -- --
========================== ========== ========== ========== ==========
Balance at
December 31, 1998 ........ 18,659,748 $ 18,660 71,410 $ 71
========================== ========== ========== ========== ==========
<PAGE>
<CAPTION>
Accumulated
Additional Other Total
Paid-In Accumulated Comprehensive Treasury Stock Shareholders'
Capital Deficit Income Shares Amount Equity
============ ============ ============== ========== ============ ==============
<S> <C> <C> <C> <C> <C> <C>
Balance
at December 31, 1997 ..... $ 32,388 $ (46,583) $ (133) -- $ -- $ (6,054)
========================== ========== =========== ========== ========== =========== ==============
Conversions:
Common B to
Common A ............. (189) -- -- -- -- --
Preferred A to
Common A ............. 3,016 -- -- -- -- 4,934
Debenture to
Common A ............. 3,680 -- -- -- -- 5,171
Exercise of options ...... 525 -- -- -- -- 680
Issuance of
Common Stock:
Private placement .... 12,127 -- -- -- -- 18,793
Interest payments .... 157 -- -- -- -- 188
Employee stock
purchase plan ........ 8 -- -- -- -- 15
Compensation related
to warrants and
options issuance ......... 322 -- -- -- -- 322
Dividends on
Redeemable Preferred
Stock .................... -- (1,740) -- -- -- (1,740)
Accretion on
Redeemable Preferred
Stock .................... -- (1,424) -- -- -- (1,424)
Collection of Common
Stock Warrants
Subscription Receivable .. 851 -- -- -- -- 851
Treasury stock purchase... -- -- -- (100,000) (281) (281)
Comprehensive
Income (Loss):
Net loss ............. -- (19,020) -- -- -- (19,020)
Foreign currency
translation .......... -- -- (55) -- -- (55)
Unrealized gain on
securities available
for sale ............. -- -- (8) -- -- (8)
Total Comprehensive
Income (Loss):............ -- -- -- -- -- (19,083)
========================== ========== ========== ========== ========== ============ ==========
Balance at
December 31, 1998 ........ $ 52,885 $ (68,767) $ (196) (100,000) $ (282) $ 2,372
========================== ========== ========== ========== ========== ============ ==========
</TABLE>
See Notes to the Consolidated Financial Statements
F-6
<PAGE>
<TABLE>
<CAPTION>
Base Ten Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(dollars in thousands)
Two Months
Year Ended Ended Year Ended Year Ended
December 31, December 31, October 31, October 31,
1998 1997 1997 1996
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (19,020) $ (3,936) $ (22,007) $ (8,959)
Adjustments to Reconcile Net Loss to Net Cash Used in
Operating Activities of Continuing Operations:
Depreciation and amortization 3,295 360 3,703 4,172
Stock-based compensation 322 543 2,750 --
Deferred gain on sale of building (19) (3) (19) (19)
Deferred income taxes -- -- -- (83)
Changes in operating assets and liabilities, excluding
effects of discontinued business:
Accounts receivable (789) 225 2,008 (1,481)
Other current assets (117) 433 305 366
Accounts payable and accrued expenses (802) (1,657) 3,792 1,766
Income taxes payable -- -- -- (1,038)
- - -------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Operations (17,130) (4,035) (9,468) (5,276)
===============================================================================================================================
Cash Flows from Investing Activities:
Additions to property, plant and equipment (592) (244) (617) (1,058)
Additions to capitalized software costs and other assets (724) (148) (3,360) (4,126)
Purchase of assets related to FlowStream product (2,099) -- -- --
- - -------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (3,415) (392) (3,977) (5,184)
===============================================================================================================================
Cash Flows from Financing Activities:
Repayment of amounts borrowed (53) (14) (59) (113)
Proceeds from issuance of long-term debt -- -- 5,500 10,000
Proceeds from issuance of redeemable preferred stock 9,380 7,995 -- --
Proceeds from issuance of common stock 19,592 607 2,032 806
Proceeds from sale of discontinued business -- 3,500 -- --
- - -------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided from Financing Activities 28,919 12,088 7,473 10,693
===============================================================================================================================
Effect of Exchange Rate Changes on Cash (55) (45) 9 11
===============================================================================================================================
Net (Decrease)/Increase In Cash 8,319 7,616 (5,963) 244
Cash, beginning of year 9,118 1,502 7,465 7,221
- - -------------------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 17,437 $ 9,118 $ 1,502 $ 7,465
===============================================================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for interest $ 1,401 $ 88 $ 937 $ 485
===============================================================================================================================
Supplemental Disclosures of Non-Cash Investing and
Financing Activities:
Retirement of treasury common stock $ -- $ -- $ -- $ 8
Treasury stock purchase obligation $ 281 $ -- $ -- $ --
===============================================================================================================================
</TABLE>
See Notes to the Consolidated Financial Statements
F-7
<PAGE>
Base Ten Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, October 31, 1997 and 1996 and
Two Months Ended December 31, 1997
A. Basis of Presentation and Liquidity
- - --------------------------------------
The Company's financial statements have been prepared on the basis that
it will continue as a going concern. The Company has incurred significant
operating losses and negative cash flows in recent years. Also, at December 31,
1998 the Company was below the $4 million minimum net tangible assets, as
defined, required for its current listing on the NASDAQ National Market System.
In March 1999, the Company's shareholders' equity was increased by approximately
$9.6 million through the conversion of its $10 million convertible debenture
into common stock. Coincident with that debt conversion, the Company's Series A
Redeemable Convertible Preferred Stock was converted into Series B Redeemable
Convertible Preferred Stock. These Preferred Stocks have certain Redemption
Events, which if such events occurred, would provide the holder with the right
to require the Company to purchase their shares for cash which would adversely
affect the Company. (See Note N to the Consolidated Financial Statements.)
Accordingly, where these rights exist such Redeemable Securities are categorized
outside of shareholders' equity and, thus, do not qualify as equity for the
purposes of the NASDAQ minimum net tangible asset requirement. Also, security
holders may have other rights/claims in connection with the March 1999
transactions described above.
To further increase the Company's net tangible assets and in order to
help further ensure the Company's compliance with NASDAQ listing requirements,
management is in the process of negotiating with participants in the March 1999
debt conversion and Preferred Stock exchange to obtain waivers of any redemption
or recession rights. These waivers, if obtained, would eliminate the holders'
cash redemption rights. This would qualify all related securities for
classification in permanent stockholders' equity and increase the Company's
qualifying net tangible assets. If such waivers are obtained, then management
believes that the Company's current liquidity would be sufficient to meet its
cash needs for its existing business through fiscal 1999. However, there can be
no assurance that management's efforts in this regard will be successful.
If management is not successful in obtaining such waivers, and it
continues to incur operating losses it could fall below the minimum net asset
requirement needed to qualify for ongoing listing on NASDAQ. Management's plans
in this case include, among other things, attempting to improve (i) operating
cash flow through increased license sales and service revenue, and (ii)
increasing the level of anticipated streamlining of its selling, administration
and development functions. However there is no assurance that such plans, if
implemented, will be sufficient. Further, recently there have been announcements
of potential changes in senior management, which increase the uncertainty of
whether existing management plans will be executed.
Also, the Company is considering certain significant acquisitions which
depending on net liabilities assumed, if any, and on the success of cost
reduction efforts to bring the acquisitions to break-even, may require
additional funding. (See Note U to the Consolidated Financial Statements.)
However, there can be no assurance that such acquisitions will occur, or whether
additional funds required, if any, would be available to Base Ten.
If current cash and working capital reduced by cash used in operations in
1999 is not sufficient to satisfy the Company's liquidity and minimum net
tangible asset requirements, the Company will seek to obtain additional equity
financing. Additional funding may not be available when needed or on terms
acceptable to the Company. If the Company were required to raise additional
financing for the matters described above and/or to continue to fund expansion,
develop and enhance products and service, or otherwise respond to competitive
pressures, there is no assurance that adequate funds will be available or that
they will be available on terms acceptable to the Company. Such a limitation
could have a material adverse effect on the Company's business; financial
condition or operations and the financial statements do not include any
adjustment that could result therefrom.
B. Description of Business
- - ---------------------------
Base Ten Systems, Inc. and subsidiaries ("Base Ten" or the "Company") is
engaged in the development of software applications for the pharmaceutical and
medical device industries. The Company's product lines include manufacturing
execution systems (MES), medical screening and image processing software. The
Company's primary focus is its manufacturing execution systems which include
BASE10(TM)ME (formerly PHARM2(TM)), BASE10(TM)FS and BASE10(TM)CS. The MES
products are designed to reduce time and costs associated with regulatory
compliance, manage the elements of production materials, equipment, personnel,
process instructions, as well as allow rapid fulfillment of requests and
traceability for clinical supplies.
For the periods ended October 31, 1997 and December 31, 1997, the Company
was also engaged, through its Government Technology Division ("GTD"), in the
design and manufacture of electronic systems employing safety critical software
for the defense industry. Effective December 31, 1997, the GTD was sold by the
Company. See Note S to the Consolidated Financial Statements.
C. Summary of Significant Accounting Policies
- - ----------------------------------------------
1. Principles of Consolidation - The consolidated financial statements include
the accounts of Base Ten and its wholly owned subsidiaries. All significant
inter-company accounts, transactions and profits have been eliminated.
2. Discontinued Operations - As discussed more thoroughly in Note S to the
Consolidated Financial Statements, the results of operations and the net
assets of the Government Technology Division have been reported separately
as discontinued operations for all periods presented and net assets held
for sale at October 31, 1997 in the accompanying financial statements.
3. Change of Fiscal Reporting Period - In January 1998, the Board of Directors
approved a change of the Company's fiscal year end from October 31 to
December 31.
4. Risks and Uncertainties - The Company operates in the publicly traded
software industry, which is highly competitive and rapidly changing. The
Company has had a history of significant losses from operations and is
subject to all of the risks inherent in a technology business, including
but not limited to: potential for significant technological changes in the
industry or customer requirements, potential for emergence of competitive
products with new capabilities or technologies, ability to manage future
growth, ability to attract and retain qualified employees, dependence on
key personnel, limited senior management resources, success of its research
and development, protection of intellectual property rights, potentially
long sales and implementation cycles and ongoing satisfaction of NASDAQ
minimum net tangible asset requirements for continued listing.
The preparation of financial statements in accordance with generally
accepted accounting standards requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Significant estimates include the allowance for
doubtful accounts receivable, the total costs to be incurred under software
license agreements requiring significant customizations or modifications
and the useful lives of computer software costs. Actual costs and results
could differ from these estimates.
5. Revenue Recognition - The Company licenses software under license
agreements and provides services including maintenance, training and
consulting. In general, software license revenues are recognized upon
shipment of the software to the customer where there are no significant
customizations or modifications required. Revenues on all software license
transactions in which there are significant customizations or modifications
are recognized on the percentage of completion basis. Progress under
percentage of completion method is measured based on management's best
estimate of the cost of work completed in relation to the total cost of
work to be performed under the contract. Maintenance revenues for
maintaining, supporting and providing periodic upgrades are deferred and
recognized ratably over the maintenance period which is generally one year.
Revenues from training and consulting services are recognized as such
services are performed and are on a time and material basis.
F-8
<PAGE>
On January 1, 1998, the Company adopted Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"). SOP 97-2 which supersedes
Statement of Position 91-1, "Software Revenue Recognition", generally
requires revenue earned on multiple element software arrangements to be
allocated to each element based on vendor-specific objective evidence of
the relative fair values of the elements. Absent vendor-specific evidence
of fair value of all elements in a multiple-element arrangement, all
revenue from the arrangement is deferred until such evidence exists or
until all elements are delivered. The adoption of SOP 97-2 has not had a
material impact on the Company's results of operations.
In March 1998, the AICPA issued Statement of Position 98-4, "Deferral of
the Effective Date of a Provision of SOP 97-2" ("SOP 98-4"). SOP 98-4
deferred, until the Company's fiscal year beginning January 1, 1999, the
application of certain passages in SOP 97-2, which limit what is considered
vendor-specific objective evidence necessary to recognize revenue for
software licenses in multiple-element arrangements when undelivered
elements exist. In December 1998, the AICPA issued Statement of Position
98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect
to Certain Transactions"("SOP 98-9"). SOP 98-9 further deferred those
passages deferred by SOP 98-4 until the Company's fiscal year beginning
January 1, 2000. SOP 98-9 also amends certain passages of SOP 97-2 which
address the allocation of discounts in multiple element arrangements.
Management has not determined the impact, if any, that the application of
SOP 98-9 will have on its consolidated financial position or results of
operations.
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 30 years
Leasehold improvements 5 to 10 years
Furniture, fixtures and equipment 3 to 10 years
Maintenance and repairs are charged to expense as incurred; expenditures
for leasehold improvements are generally capitalized. Upon sale or
retirement of an asset, the related costs and accumulated depreciation are
removed from the accounts and any gain or loss is recognized.
7. Research, Development and Computer Software Costs - In accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for Costs
for Computer Software to be Sold, Leased or Otherwise Marketed" ("FAS 86"),
the Company capitalizes certain software development costs for new products
once it is determined that technological feasibility is achieved. Costs
incurred prior to the determination of technological feasibility and costs
associated with maintenance of existing products are expensed as incurred.
The cost of purchased software is capitalized when related to a product
which has achieved technological feasibility or that has an alternative
future use. Commencing upon initial product release, these costs are
amortized based on the straight-line method over the estimated useful life
of not greater than four years.
8. Long-Lived Assets - The Company accounts for long-lived assets in
accordance with the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for Impairment of Long-Lived Assets and Long
Lived Assets to be Disposed Of" ("FAS 121"). FAS 121 requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. 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. The
Company has evaluated its long-lived assets and determined that no material
impairment of these assets existed at December 31, 1998.
F-9
<PAGE>
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 to cost of revenues.
9. Cash and Cash Equivalents - The Company considers all investments with an
original maturity of three months or less at date of acquisition to be cash
equivalents.
10. Earnings Per Share - The Company calculates earnings per share in
accordance with the provisions of Statement of Financial Accounting
Standard No. 128, "Earnings Per Share" ("FAS 128"). FAS 128 requires the
Company to present Basic Earnings Per Share which excludes dilution and
Diluted Earnings Per Share which includes potential dilution.
11. Fair Value of Financial Instruments - The fair value of certain
financial instruments, including cash, accounts receivable, accounts
payable, and other accrued liabilities, approximates 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 December
31, 1998, December 31, 1997 and October 31, 1997 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. Foreign Currency Translation - The accounts of the consolidated foreign
subsidiaries are translated into United States dollars in accordance with
Statement of Financial Accounting Standard No. 52, "Foreign Currency
Translation" ("FAS 52"). All balance sheet accounts have been translated
using the current rate of exchange at the balance sheet date. Results of
operations have been translated using the average rates prevailing
throughout the year. Translation gains or losses resulting from the changes
in the exchange rates from year-to-year are accumulated in a separate
component of shareholders' equity. Transaction gains and losses are
immaterial.
13. Income Taxes - Deferred income taxes are determined based on the tax effect
of the differences between the financial statement and tax bases of assets
and liabilities. Deferred tax assets and liabilities are classified as
either current or noncurrent based generally on the classification of the
related asset or liability.
14. Investments - The Company accounts for its investments using Statement of
Financial Accounting Standard No. 115, "Accounting for Certain Investments
in Debt and Equity Securities"("FAS 115"). This standard requires that
certain debt and equity securities be adjusted to market value at the end
of each accounting period. Unrealized market value gains and losses are
charged to earnings if the securities are traded for short-term profit.
Otherwise, such unrealized gains and losses are charged or credited to a
separate component of shareholders' equity.
Management determines the proper classifications of investments in
obligations with fixed maturities and marketable equity securities at the
time of purchase and reevaluates such designations as of each balance sheet
date. At December 31, 1998, December 31, 1997 and October 31, 1997, all
securities covered by FAS 115 were designated as available for sale.
Accordingly, these securities are stated at fair value, with unrealized
gains and losses reported in a separate component of shareholders' equity.
Securities available for sale at December 31, 1998, December 31, 1997 and
October 31, 1997, consisted of common stock with a cost basis of $50,000,
$50,000 and $150,000, respectively and are included in other current
assets. Differences between cost and market of $54,000, $62,000 and
$143,000 were included as a component of "accumulated other comprehensive
income" in shareholders' equity, as of December 31, 1998, December 31, 1997
and October 31, 1997, respectively.
15. Segment Information - On January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 supersedes
Statement of Financial Accounting Standards No. 14, "Financial Reporting
for Segments of a Business Enterprise" ("FAS 14") replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the
Company's reportable segments. FAS 131 also requires disclosures about
products and services, geographic areas and major customers. The adoption
of FAS 131 did not affect results of operations or the financial position
but did affect the disclosure of segment information.
F-10
<PAGE>
16. Comprehensive Income - On January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("FAS 130"). FAS 130 establishes standards for reporting and presentation
of comprehensive income and its components in a full set of financial
statements. Comprehensive income consists of net income and net unrealized
gains (losses) on securities and is presented in the consolidated
statements of shareholders' equity. The Statement requires only additional
disclosures in the consolidated financial statements; it does not affect
the Company's financial position or results of operations. Prior year
financial statements have been reclassified to conform to the requirements
of FAS 130.
17. Reclassifications - Certain reclassifications have been made to prior year
financial statements to conform to the current year presentation.
D. Acquisition
- - ---------------
On February 19, 1998, the Company acquired certain assets and assumed
certain liabilities of Consilium, Inc. ("Consilium"), a software developer that
specialized in manufacturing execution systems for the pharmaceutical, chemical
and semi-conductor industries. The assets purchased related to the FlowStream
product line of Consilium, which was sold to the pharmaceutical and chemical
markets. Under the terms of the agreement, the Company paid Consilium $1.5
million in cash and included assumed certain FlowStream-related liabilities of
Consilium, which together with transaction costs in cash of approximately
$600,000, resulted in a total purchase cost of $3.0 million. The agreement also
provides for additional payments based upon a percentage of the excess of
targeted sales of the FlowStream product, as defined, for the years ended
December 31, 1998 and 1999, respectively. No additional payments were required
for 1998. The cash portion of the acquisition was financed with the Company's
available cash balance. This acquisition was accounted for by the purchase
method of accounting.
The purchase price was allocated to the assets acquired based on their
estimated fair values. Equipment and furniture were purchased at estimated fair
value and are being depreciated over estimated lives of three to ten years.
Other intangible assets acquired are being amortized on a straight-line basis
over their estimated lives of three to seven years.
<PAGE>
Unaudited Pro-forma Results
- - ---------------------------
The following unaudited pro-forma information presents the results of
operations of the Company as if the acquisition had taken place on November 1,
1996 (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
Two Months
Year Ended Ended Year Ended
December 31, December 31, October 31,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Revenue $ 8,259 $ 1,044 $ 7,839
Net loss (19,869) (4,969) (28,207)
- - -------- -------- ------- --------
Net loss per common share - basic and
diluted $ (2.17) $ (0.60) $ (3.57)
Weighted average common shares - basic and
diluted 10,618,000 8,258,000 7,895,000
---------- --------- ---------
</TABLE>
F-11
<PAGE>
These pro-forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on the date
indicated, or which may result in the future.
E. Accounts Receivable
- - -----------------------
Accounts receivable are comprised of billed receivables arising from
recognized and deferred revenues and unbilled receivables which result from
consulting services. All of the unbilled receivables are expected to be billed
during the following year. The Company does not require collateral for its
receivables. Reserves are maintained for potential credit losses. The principle
components of accounts receivables are as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31, December 31, October 31,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Billed receivables $ 2,456 $ 537 $ 504
Unbilled receivables 236 1,186 1,444
--- ----- -----
2,962 1,723 1,948
Less: Allowance for doubtful accounts 320 140 140
--- --- ---
$ 2,372 $ 1,583 $ 1,808
=========== =========== ===========
</TABLE>
Bad debt expense amounted to $449,000 for the year ended December 31, 1998
and $140,000 for the year ended October 31, 1997. There was not any bad debt
expense recorded during the two month period ended December 31, 1997 and the
year ended October 31, 1996.
F. Property, Plant and Equipment
- - ---------------------------------
Property, plant and equipment at December 31, 1998 and 1997 and October 31,
1997 includes the following amounts (dollars in thousands):
<TABLE>
<CAPTION>
December 31, December 31, October 31,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Leasehold improvements $ 343 $ 156 $ 149
Furniture, fixtures and equipment 5,160 4,255 4,018
Land and building 3,600 3,600 3,600
----- ----- -----
9,103 8,011 7,767
Less: Accumulated depreciation 4,077 3,665 3,462
----- ----- -----
$ 5,026 $ 4,346 $ 4,305
=========== =========== ===========
</TABLE>
Depreciation expense amounted to $412,000, $203,000, $530,000, and $462,000,
in fiscal 1998, the two month period December 31, 1997, fiscal 1997, and fiscal
1996, respectively.
<PAGE>
G. Other Assets
- - ----------------
Other assets at December 31, 1998 and 1997 and October 31, 1997 includes
the following amounts (dollars in thousands):
<TABLE>
<CAPTION>
December 31, December 31, October 31,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Patents, net $ 356 $ 395 $ 404
Capitalized software costs, net 2,943 4,548 4,815
Debenture issue costs, net 393 971 1,032
Deposit-long term financing obligation 550 550 550
Long-term receivable -- 397 419
Other acquired intangibles, net 2,130 -- --
------------ -------------- -----------
--
$ 6,372 $ 6,861 $ 7,220
============ ============== ===========
</TABLE>
F-12
<PAGE>
Accumulated amortization related to the patents at December 31, 1998 and
1997 and October 31, 1997 was $37,000, $28,000 and $19,000, respectively.
Accumulated amortization related to the capitalized software costs at
December 31, 1998 and 1997 and October 31, 1997 was $7,052,000, $4,778,000 and
$4,363,000, respectively. Amortization of capitalized software costs of
$2,274,000, $415,000, $2,951,000 and $1,278,000 are included in cost of revenues
for the year ended December 31, 1998, the two months ended December 31, 1997 and
the years ended October 31, 1997 and 1996, respectively.
Accumulated amortization related to the debenture issue costs at December
31, 1998 and 1997 and October 31, 1997 was $207,000, $282,000 and $221,000,
respectively.
Accumulated amortization and expense related to the acquired intangibles
at December 31, 1998 was $351,000.
H. Income Taxes
- - ----------------
The provision (benefit) for income taxes includes the following (dollars
in thousands):
<TABLE>
<CAPTION>
Year Ended Two Months Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 October 31, 1997 October 31, 1996
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Current:
Federal $ -- $ -- $ -- $ (882)
State -- -- -- (165)
Foreign -- -- -- --
------------ ------------ ------------ --------------
Total Current $ -- $ -- $ -- $ (1,047)
============ ============ ============ ==============
Deferred:
Federal $ 5,192 $ 1,179 $ 6,373 $ --
State 1,507 342 972 --
Foreign -- -- -- --
------------ ------------ ------------ --------------
Total Deferred 6,699 1,521 7,345 --
------------ ------------ ------------ --------------
Valuation Allowance (6,699) (1,521) (7,345) --
------------ ------------ ------------ --------------
Net $ -- $ -- $ -- $ (1,047)
============ ============ ============ ==============
</TABLE>
The provision (benefit) for income taxes is allocated between continuing
and discontinued operations as summarized below (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended Two Months Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 October 31, 1997 October 31, 1996
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Continuing $ -- $ -- $ -- $ (684)
Discontinued -- -- -- (363)
------------ ------------ ------------ --------------
Total $ -- $ -- $ -- $ (1,047)
============ ============ ============ ==============
</TABLE>
<PAGE>
A reconciliation of the Company's effective rate to the U.S. statutory
rate is as follows:
<TABLE>
<CAPTION>
Percentage of Pre-Tax Earnings
--------------------------------------------------------
Two
Year Ended Months Year Ended Year Ended
December 31, Ended October 31, October 31,
1998 December 31, 1997 1996
1997
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Federal tax (benefit)/provisions at applicable statutory (34.0%) (34.0%) (35.0%) (34.0%)
rates
Increases (decreases) in income taxes resulting from:
State tax benefit, net of Federal tax effect (6.0) (6.0) -- (6.0)
Net changes in current and deferred valuation
allowances 40.0 40.0 35.0 31.5
Other, net -- -- -- (2.9)
----- ----- ----- -----
-- -- -- (11.4%)
======== ===== ===== =======
</TABLE>
F-13
<PAGE>
The components of the deferred tax assets and liabilities are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended Two Months Ended Year Ended
December 31, December 31, October 31,
1998 1997 1997
<S> <C> <C> <C>
Current
Vacation $ 154 $ 221 $ 136
Other 605 56 16
------ ----- ------
Total current assets 759 277 152
------ ----- ------
Noncurrent
Deferred gain on sale leaseback
$ 91 $ 91 $ 90
Compensation 1,255 1,100 1,100
Depreciation and amortization (107) (78) 86
Net operating loss carryforward 17,210 10,963 9,560
Research and development
carryforward 519 519 519
-------- --------- -------
Total non-current assets 18,968 12,751 11,355
Valuation allowance (19,727) (13,028) (11,507)
-------- --------- --------
Net deferred tax assets $ -- $ -- $ --
======== ========= ========
</TABLE>
At December 31, 1998, the Company had incurred net operating loss ("NOL")
carryforwards for federal income tax purposes of approximately $43.7 million,
which expire in the years 2004 through 2018. Research and development
carryforwards of $0.5 million expire in the years 1999 through 2005. As certain
changes in the Company's ownership occur there is a limitation on the annual
amount of such NOL carryforwards and credits which can be utilized. Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 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 components of loss before income taxes were as follows:
<TABLE>
<CAPTION>
Year Ended Two Months Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 October 31, 1997 October 31, 1996
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Domestic $ (16,679) $ (3,803) $ (20,632) $ (9,040)
Foreign (2,341) (133) (1,375) (966)
------ ---- ------ ----
$ (19,020) $ (3,936) $ (22,007) $ (10,006)
========= ============ ========== ==========
</TABLE>
<PAGE>
I. Accrued Expenses
- - --------------------
Accrued expenses at December 31, 1998 and 1997 and October 31, 1997
includes the following amounts (dollars in thousands):
<TABLE>
<CAPTION>
December 31, December 31, October 31,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Wages & benefits $ 1,221 $ 2,013 $ 2,283
Discontinued operations -- -- 1,480
Accrued contract costs and warranty 394 1,151 1,151
Accrued Interest 301 339 225
Other 1,236 603 514
---------- ---------- ----------
$ 3,152 $ 4,106 $ 5,653
========== ========== ==========
</TABLE>
F-14
<PAGE>
J. Segment Information
- - -----------------------
The Company is organized and operates as a single segment. The following
tabulation details the Company's operations in different geographic areas for
the year ended December 31, 1998, the two-month period ended December 31, 1997
and the years ended October 31, 1997 and 1996 (dollars in thousands):
<TABLE>
<CAPTION>
United States Europe Eliminations Consolidated
------------- ------ ------------ ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998:
- - -----------------------------
Revenues from unaffiliated sources $4,019 $ 3,531 $ -- $ 7,550
------ ------------- ------------- -------------
Identifiable assets at December 31, 1998 $39,350 $ 1,353 $ (6,882) $ 33,821
------- ------------- ------------- ------------
Two-Months Ended December 31, 1997:
- - -----------------------------------
Revenues from unaffiliated sources $ 82 $ 99 $ -- $ 181
------- ------------- ------------- -------------
Identifiable assets at December 31, 1997 $ 27,568 $ 1,137 $ (4,291) $ 24,413
-------- ------------- ------------- -------------
Year Ended October 31, 1997:
- - ----------------------------
Revenues from unaffiliated sources $2,510 $ 2 $ -- $ 2,512
------ ------------- -------------- ------------
Identifiable assets at October 31, 1997 $24,979 $ 1,205 $ (4,967) $ 21,217
------- ------------- -------------- ------------
Year Ended October 31, 1996:
- - ----------------------------
Revenues from unaffiliated sources $ 1,211 $ 51 $ -- $ 1,262
------- ------------- ----------- ------------
Identifiable assets at October 31, 1996 $32,739 $ 1,039 $ (3,381) $ 30,397
------- ------------- ------------- ------------
</TABLE>
In fiscal year 1998, one customer accounted for sales amounting to
$1,655,000 and four customers accounted for sales of $136,000 in the two-month
period ended December 31, 1997. In fiscal year 1997, three customers accounted
for sales of $1,221,000 and in fiscal year 1996 one customer accounted for sales
of $883,000.
<PAGE>
K. Commitments and Contingencies
- - ---------------------------------
Employment Agreements
- - ---------------------
At December 31, 1998, the Company had employment agreements with six
executives. One of these agreements was cancelled pursuant to a subsequent
resignation. The remaining agreements provide for up to one year of severance
payments in the aggregate of $897,000 plus normal benefits and any amounts due
under incentive compensation plans in the event the employee is terminated
without cause. In addition, subsequent to year end, the Company entered into
similar agreements with four additional executives with aggregate benefits
amounting to $238,000.
At December 31, 1998, the Company also had agreements with three of these
executives 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 the amount deductible by the
Company under the Internal Revenue Code.
Consulting Agreements
- - ---------------------
The Company has a consulting agreement providing one of its directors cash
compensation in an annual amount of $257,500 plus expenses. In fiscal 1998, the
Company terminated this agreement in accordance with the termination provision
in the agreement. The agreement provided the consultant the right to receive
warrants, subject to prior approval of the Board of Directors and subsequent
shareholder approval. The terms of the agreement termination provided that any
warrants issued pursuant to this agreement would terminate in the ordinary
course, pursuant to their respective terms.
Financing Obligation and 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. The Company also has an option to purchase the building
at the end of the lease and accordingly, has accounted for this sale leaseback
as a financing transaction. The buyer/lessor of the building was a partnership
in which two of the partners are former officers and directors of the Company.
In addition, a non-interest bearing security deposit of $550,000 was paid at
closing which is 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. Subsequent to October 31, 1997, the
Company sub-leased a portion of the building in connection with the sale of the
Government Technology Division which is approximately $240,000 per year for five
years. The Company's future minimum gross lease payments related to the
sale-leaseback arrangement in effect at December 31, 1998 are as follows
(dollars in thousands):
F-15
<PAGE>
Year Ending December 31,
- - ----------------------------------------------- ------------------
1999 $ 569
2000 615
2001 615
2002 615
2003 615
2004 and thereafter 3,963
- - ----------------------------------------------- ------------------
6,992
Less interest portion
(3,577)
- - ----------------------------------------------- ------------------
Present value of net minimum payments $ 3,415
- - ----------------------------------------------- ==================
At December 31, 1998 and 1997 and October 31, 1997, the gross amount of
the building and the related accumulated depreciation recorded under the
financing obligation were as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31, December 31, October 31,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Land and building $ 3,600 $ 3,600 $ 3,600
Less: Accumulated depreciation 500 380 360
--- --- ---
$ 3,100 $ 3,220 $ 3,240
========== ========== ==========
</TABLE>
The Company also has several noncancelable operating leases that
expire over the next ten years. These leases generally require the Company to
pay all executory costs such as maintenance and insurance. Rental expense for
operating leases during fiscal years 1998, 1997 and 1996 were $423,000, $307,000
and $259,000 respectively. Rental expense for operating leases for the two-month
period ended December 31, 1997 was $51,000. Future minimum lease payments under
noncancelable operating leases as of December 31, 1998 are (dollars in
thousands):
Year Ending December 31,
- - ------------------------------------ -------------
1999 $ 545
2000 386
2001 291
2002 218
2003 139
2004 and thereafter 728
- - ------------------------------------ -------------
Total minimum lease payments $ 2,307
- - ------------------------------------ =============
Legal Proceedings
- - -----------------
The Company is involved from time to time in various claims and
proceedings including employee claims in the normal course of business, none of
which, individually or in the aggregate, in the opinion of management, will have
a material adverse effect on the consolidated financial position of the Company.
<PAGE>
L. Long Term Debt
- - ------------------
$ 10 Million Convertible Subordinate Debenture
- - ----------------------------------------------
In August 1996 the Company sold $10.0 million 9.01% Convertible
Subordinate Debentures due August 31, 2003 in a private offering. Under the
terms of the debentures the holder could 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 had the right to call the debentures after February
28, 1998 if the Company's Class A Common Stock price traded between
$15.00-$17.50 per share.
F-16
<PAGE>
On November 10, 1998, the shareholders approved a proposal to authorize the
Company to decrease the conversion price from $12.50 to $4.00 per share of Class
A Common Stock upon conversion of the debenture. Subsequent to year-end, on
March 5, 1999, the holder converted this debenture into 2.5 million shares of
Class A Common Stock.
$ 5.5 million Convertible Debenture
- - -----------------------------------
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) an 8% five-year
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 that was issuable upon conversion of
the Convertible Debentures was variable. The number of shares were to be
calculated at the time of conversion and were to 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. These prices were subsequently
revised to $13.05 and $13.53 pursuant to an agreement between the holders and
the Company in consideration of the holders' willingness to grant the Company a
waiver to sell the GTD. The Convertible Debentures were not convertible prior to
December 16, 1997. From December 16, 1997 until February 23, 1998 one-half of
the Convertible Debentures could have been converted and after February 23,
1998, the Convertible Debentures were fully convertible. The Warrants may be
exercised at any time through May 30, 2002 at an exercise price of $12.25 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 1998, the $5.5 million Convertible Debentures were fully converted into
1,490,805 shares of Class A Common Stock.
M. Other Arrangements
- - ----------------------
In May 1997 the Company entered into an agreement whereby it became a
minority owner of uPACS(TM) 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. A then outside investor, who is currently a principal
shareholder of the Company, made an initial capital contribution of $2 million
and later made a further capital contribution of $1 million 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 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 royalties to the LLC 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 would own a 37% interest
in the LLC.
During the fourth quarter of 1998, the Company determined that it did not
have the required resources to devote to both its core manufacturing execution
software business and the uPACS(TM) business, and as a result, initiated a
search for a potential buyer of the LLC and its technology. At December 31,
1998, the LLC had substantially exhausted its capital resources and, as of the
filing date of this annual report on Form 10-K, a buyer had not yet been
located. The Company currently intends to fund the LLC operation during the
search for a buyer.
F-17
<PAGE>
N. Redeemable Convertible Preferred Stock
- - --------------------------------------------
On December 4, 1997, the Company entered into a securities purchase
agreement to sell 19,000 of Series A, $1.00 par value, Convertible Preferred
Stock ("Series A Preferred Stock") and common stock warrants for gross proceeds
of $19,000,000. The closing of the Series A Preferred Stock and warrants
occurred in two tranches. On December 9, 1997, the Company issued 9,375 shares
of Series A Preferred Stock and 375,000 warrants. An additional 346,000 warrants
were issued to consultants valued at approximately $1,011,000. The transaction
resulted in net proceeds of $6,984,000, net of offering costs of $1,380,000. The
Company allocated the net proceeds of the Series A Preferred Stocks and warrants
based upon their relative fair values resulting in $6,155,000 assigned to the
Series A Preferred Stock and $829,000 to the warrants. On December 31, 1997,
9,675 shares of Series A Preferred Stock and 385,000 warrants were issued to the
holders of the Series A Preferred Stock, net of cash offering costs of
approximately $245,000, resulting in net proceeds of $9,380,000. The company
allocated the net proceeds of the Series A Preferred Stock and the warrants
based upon their relative fair values resulting in $8,529,000 assigned to the
Series A Preferred Stock and $851,000 to the warrants. Such proceeds were
received on January 2, 1998, and are recorded as subscriptions receivable at
December 31, 1997.
The Series A Preferred Stock is convertible at any time into Class A
common shares at the Mandatory Redemption Price divided by the lesser of (a) the
volume weighted average price for any two trading days selected by the holder in
the twenty days prior to conversion, except that the holder may not accept the
lowest weighted average price ("variable conversion price"), and (b) $16.25.
Such lesser conversion price is limited to 3,040,000 shares. The most beneficial
conversion price at issuance was $12.16 which exceeded the market price value of
the common stock. Any Series A Preferred Stock unconverted outstanding because
of the share limitation can be exchanged at the holder's option for a
subordinated 8% promissory note maturing when the Series A Preferred Stock
matures. The Company has the right, at any time, to redeem all or any part of
the outstanding Series A Preferred Stock or subordinated notes at 130% of their
original purchase price.
The Series A Preferred Stock has a term of three years from the closing date
or December 31, 2000. On the maturity date, the Company must redeem the
outstanding preferred stock at its Mandatory Redemption Price, which is the sum
of purchase price, accrued but unpaid dividends and other contingent payments as
provided under the terms of the preferred stock agreement. The portion of the
Mandatory Redemption Price constituting such other contingent payments is
payable in cash whereas the purchase price and accrued but unpaid dividends are
payable in cash or common stock at the option of the Company. Accordingly, the
Company is accreting the carrying value of the preferred stock to the purchase
price and recognizing the accretion charges to retained earnings (accumulated
deficit) over the three year period from issuance to maturity. The accretion in
1998 aggregated approximately $1,424,000 or approximately $356,000 per quarter.
If the Company elects to settle the redemption in common stock, the Mandatory
Redemption Price is 1.25 times the purchase price and would result in an
additional charge in the period of redemption.
Holders of the Series A Preferred Stock have the right to require the
Company to purchase their shares for cash upon the occurrence of a Redemption
Event. Redemption Events include: a) suspension of trading or delisting from
specified stock exchanges of the common stock into which the Series A Preferred
Stock is convertible; b) failure by the Company to register, within 180 days,
the common stock into which the Series A Preferred Stock is convertible; c)
failure to issue common stock upon exercise of conversion rights by a preferred
shareholder, or d) failure to pay any amounts due to preferred shareholders. The
cash purchase price upon occurrence of a Redemption Event is the greater of a)
1.25 times the Mandatory Redemption Price, or b) the Mandatory Redemption Price
divided by the product of the effective conversion price and the market value of
the common shares. Any remaining accretion to the actual cash purchase price
would be recorded upon a Redemption Event.
The Series A Preferred Stock is mandatorily redeemable upon the occurrence
of a Redemption Event and, accordingly, is classified as Redeemable Preferred
Stock, rather than as a component of Shareholders' Equity (Deficit).
The Series A Preferred Stock pays a cumulative dividend of 8.0% per annum
in cash or stock at the option of the Company, or as noted above, during any
quarter in which the closing bid price for the Class A common stock was less
than $8.00 for any ten consecutive trading days. An equivalent payment was
payable to any holder of Series A Preferred Stock which was subject during any
quarter to a standstill period following a Company underwritten public offering
or which was non-convertible because of the limitations on the number of common
shares issuable upon conversion. Such dividends and payments were payable only
prior to conversion and payable in cash or additional Series A Preferred Stock
at the Company's option; however, if the Company elected to pay the dividend in
Series A Preferred Shares, the amount of such payment would have been 125% of
the cash amount. In 1998, the Company elected to satisfy these dividends with
shares of Series A Preferred Stock.
F-18
<PAGE>
The Series A Preferred Stock has a liquidation preference as to their
principal amount and any accrued and unpaid dividends. The Company has reserved
3,800,000 shares of common stock for conversion of Series A Preferred Stock and
exercise of the common stock warrants.
The holders of the Series A Preferred Stock have the same voting rights as
the holders of Class A common stock, calculated as if all outstanding shares of
Series A Preferred Stock had been converted into shares of Class A common Stock
on the record date for determination of shareholders entitled to vote on the
matter presented.
The 760,000 warrants issued to the holders of Series A Preferred Stock are
exercisable for five years at $16.25 per share. The holder may also elect to pay
the exercise price by receiving a reduced number of common shares in lieu of
paying the cash exercise price. The warrant agreements also provide for an
adjustment of the warrant exercise price upon the issuance of common stock or
equivalents with an exercise price below the current market price of the common
stock. This adjustment does not apply to the issuance of options under existing
plans or shares issued upon the exercise of options, warrants or rights
outstanding when the warrants were issued. The adjustment does apply to other
transactions where the Board of Directors determines an adjustment is necessary
to equitably protect the rights of the holder. The 346,000 warrants issued to
consultants are excercisable for five years and have exercise prices ranging
from $10.31 to $15.63 and bear similar terms to the warrants issued to the
holders of Series A Preferred Stock.
On November 10, 1998, the shareholders approved the sale and issuance of
Series B Convertible Preferred Stock ("Series B Preferred Shares") (subject to
the execution of definitive agreements) and the issuance of Class A Common Stock
Purchase Warrants to the Series A Preferred Stockholders that would receive
Series B Preferred Shares. The sale and issuance of Series B Preferred Shares
would be to the Series A Convertible Preferred Stockholders in the form of an
even exchange for Series A Preferred Shares. The terms of the Series B Preferred
Shares are similar to the Series A Preferred Shares, except that: (a) the Series
B Preferred Shares would have a conversion price of that number of shares
determined by dividing the Mandatory Redemption Price by $4.00, as defined above
in Series A Preferred Stock, whereas the conversion price of the Series A
Preferred Shares is equal to the lesser of (i) $16.25 or (ii) the Weighted
Volume Average Price (as defined) of the Class A Common Stock prior to the
conversion date limited to 3,040,000 shares; (b) the Series B Preferred Shares,
as a result of the conversion price of $4.00, would not provide the holder with
the option to receive a subordinated 8% promissory note, as the Series A
Preferred Shares provides; and (c) there will be no dividend payment due based
on the price of the Class A Common Stock, as the Series A Preferred Shares
provides.
The issuance of Class A Common Stock Purchase Warrants to the Series A
Preferred Stockholders that would receive Series B Preferred Shares provides for
the issuance of 80,000 Class A Common Stock Purchase Warrants for each $1
million of principal amount of the Series A Preferred Shares outstanding on
November 10, 1998 in addition to certain other Series A Preferred Shares which
were converted at $4.00 per share between September 1, 1998 and November 10,
1998. These purchase warrants are four-year warrants exercisable at $3.00, and
provide for mandatory exercise upon the occurrence of certain events.
During 1998, 5,798 shares of Series A Convertible Preferred Stock were
converted to 1,917,806 shares of Class A Common Stock and 1,740 shares of Series
A Preferred Stock were issued as dividends resulting in 14,942 shares
outstanding at December 31, 1998.
Subsequent to year-end, on March 5, 1999, the outstanding Series A
Preferred Stock and warrants were exchanged for Series B Preferred Stock. See
Note N to the Consolidated Financial Statements.
O. Equity Transactions
- - -----------------------
Common Stock
On April 16, 1998, the shareholders amended the Company's Certificate of
Incorporation to modify certain terms of the Class A Common Stock and Class B
Common Stock. The modifications to the terms of the Class A and Class B Common
Stock increased the exchange ratio for conversion of Class B Common Stock into
Class A Common Stock from 1:1 to 1:1.5; changed the voting rights of the Class A
Common Stock and the Class B Common Stock with respect to the election of
directors so that the directors of the Company will be elected by holders of
Class A Common Stock and Class B Common Stock voting together as a single class;
made the voting rights of both classes the same so that they have the same
voting power; eliminated a separate class vote of Class B Common Stock holders
on certain corporate transactions; and changed the dividend restriction so that
Class A Common Stock and Class B Common Stock receive the same dividends.
F-19
<PAGE>
In December 1997, the National Association of Securities Dealers, Inc.
("NASD"), notified the Company that it proposed to de-list the Class B Common
Stock from Nasdaq SmallCap Market because the number of holders of Class B
Common Stock appeared to have fallen below 300 beneficial owners. The Company
proposed the amendments to alleviate certain negative impact of such de-listing
of the Class B Common Stock, and the NASD granted to the Company a temporary
exception, until May 1, 1998, in order to permit the Company to effect these
amendments. Following the close of business on May 1, 1998, the Class B Common
Stock was no longer listed on the Nasdaq SmallCap Market.
Also on April 16, 1998, the shareholders approved the adoption of three
equity plans and an increase in the authorized Class A Common Stock from 22
million shares to 40 million shares.
On November 10, 1998, the shareholders approved an increase in the
authorized Class A Common Stock from 40 million to 60 million shares and the
sale and issuance of up to 6,666,666 shares of Class A Common Stock at a
purchase price of $3.00 per share, and Warrants to purchase up to 1,000,000
shares of Class A Common Stock at an exercise price of $3.00 per share.
In order to provide additional capital to the Company, the Company agreed
to sell 6,666,666 shares of Class A Common Stock at a purchase price of $3.00
per share for aggregate proceeds of $20,000,000. For each $1 million of Class A
Common Stock purchased, the purchaser received seven-year warrants to purchase
50,000 shares of Class A Common Stock, exercisable at $3.00 per share; a total
of 1,000,000 warrants were, therefore, issued to the purchaser. The placement
agent also received warrants to purchase up to 250,000 shares of Class A Common
Stock.
F-20
<PAGE>
P. Earnings Per Share
- - ---------------------
The following is a reconciliation of the numerators and denominators used
to calculate loss per share in the Consolidated Statements of Operations (in
thousands, except per share data):
<TABLE>
<CAPTION>
Two Months
Year Ended Ended Year Ended Year Ended
December 31, December 31, October 31, October 31,
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loss per common share-basic:
Net loss $ (19,020) $ (3,936) $ (22,007) $ (8,959)
Less: Dividends on Redeemable
Convertible Preferred Stock (1,740) -- -- --
Accretion on Redeemable
Convertible Preferred Stock (1,424) -- -- --
------ ----- ------- -----
Net loss to common shareholders (numerator) $ (22,184) $ (3,936) $ (22,007) $ (8,959)
------ ----- ------- -----
Weighted average shares - basic (denominator) 10,618,000 8,258,000 7,895,000 7,743,000
------ ----- ------- -----
Net loss per common share-basic $ (2.09) $ (0.48) $ (2.79) $ (1.16)
====== ===== ======= =====
Loss per common share-fully diluted:
Net loss $ (19,020) $ (3,936) $ (22,007) $ (8,959)
Less: Dividends on Redeemable
Convertible Preferred Stock (1,740) -- -- --
Accretion on Redeemable
Convertible Preferred Stock (1,424) -- -- --
------ ----- ------- -----
Net loss to common shareholders (numerator) $ (22,184) $ (3,874) $ (22,007) $ (8,959)
------ ----- ------- -----
Weighted average shares 10,618,000 8,258,000 7,895,000 7,743,000
Effect of dilutive options / warrants -- -- -- --
------ ----- ------- -----
Weighted average shares-fully diluted 10,618,000 8,258,000 7,895,000 7,743,000
(denominator)
------ ----- ------- -----
Net loss per common share-diluted $ (2.09) $ (0.48) $ (2.79) $ (1.16)
====== ===== ======= =====
</TABLE>
Stock options, warrants and rights would have an anti-dilutive effect on
earnings per share for the years ended December 31, 1998, October 31, 1997 and
1996 and the two month period ended December 31, 1997 and, therefore, were not
included in the calculation of fully diluted earnings per share.
Q. 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 further shares available for option under this plan.
The Company's 1992 Incentive 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 that are
exercisable over a period not to exceed ten years. There are no further shares
available for option under this plan.
The Company's Discretionary Deferred Compensation Plan reserves 1,150,000
shares of Class A Common Stock for issuance upon the exercise of options. There
are no options 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 reserves 750,000 shares of
Class A Common Stock for issuance upon the exercise of options. 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. There are no options
available for grant under this plan.
<PAGE>
The Company's Base Ten Stock Option Plan reserves 80,000 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 that are exercisable
over a period not to exceed ten years. There are no options available for grant
under this plan.
The Company's 1998 Stock Option and Stock Award Plan reserves 3,000,000
shares of Class A Common Stock for purchase upon the exercise of options.
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. This plan
allows for the re-issuance of any canceled or expired options. Approximately
590,000 options remain available for grant under this plan.
F-21
<PAGE>
A summary of the status of the Company's aforementioned stock option plans
as of October 31, 1996 and 1997 and December 31, 1997 and 1998 and changes
during the periods ending on those dates is presented below:
<TABLE>
<CAPTION>
Class A Class B
-------------------------------------------------------------
Weighted - Weighted - Total
Number of Average Number of Average Number of
Shares Exercise Price Shares Exercise Price Shares
------ -------------- ------ -------------- ------
<S> <C> <C> <C> <C> <C>
Outstanding at October 31, 1995 1,265,394 $ 7.82 4,946 $ 3.00 1,270,340
Granted 307,700 10.79 -- 307,700
Exercised (103,351) 7.06 -- (103,351)
Canceled (3,850) 11.15 (3,850)
------ ----- ------
Outstanding at October 31, 1996 1,465,893 $ 8.85 4,946 $ 3.00 1,470,839
========= ====== ===== ====== =========
Granted 574,650 11.33 -- 574,650
Exercised (78,130) 6.81 -- (78,130)
Canceled (57,750) 9.73 -- (57,750)
------- ---- -------
Outstanding at October 31, 1997 1,904,663 $ 9.66 4,946 $ 3.00 1,909,609
========= ====== ===== ====== =========
Granted -- -- -- -- --
Exercised (50,584) 9.67 -- (50,584)
Canceled
--------- ------ ----- ------ ---------
Outstanding at December 31, 1997 1,854,079 9.65 4,946 $ 3.00 1,859,025
========= ====== ===== ====== =========
Granted 2,546,100 2.94 -- 2,546,100
Exercised (125,232) 3.84 (4,946) 3.00 (130,178)
Canceled (404,324) 9.15 (404,324)
--------- ------ ----- ------ ---------
Outstanding at December 31, 1998 3,870,623 5.47 -- -- 3,870,623
========= ====== ===== ====== =========
Exercisable at December 31, 1998 1,942,823 $ 7.62 -- $ -- 1,942,823
========= ====== ===== ====== =========
</TABLE>
<PAGE>
The following tables summarizes information about the stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- --------------------------------
Weighted-Average
Number Remaining Number
Outstanding Contractual Weighted-Average Exercisable at Weighted-Average
at December Life (in years) Exercise Price December 31, Exercise Price
Range of Exercise Prices 31, 1998 1998
- - -------------------------- --------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 2.00 - $ 4.00 1,958,027 9.51 $ 2.21 525,227 $ 2.30
$ 5.13 - $ 8.00 622,620 8.09 $ 5.65 247,620 $ 6.43
$ 8.06 - $10.88 866,976 5.51 $ 9.67 866,976 $ 9.67
$11.13 - $14.50 423,000 7.34 $ 11.69 303,000 $ 11.91
</TABLE>
The Company's 1998 Employee Stock Purchase Program authorizes the issuance
of up to 1,000,000 shares of Class A Common Stock for purchase by Company
employees. Shares are purchased at 85% of the fair market value on standard
quarterly purchase dates as defined in the plan. Approximately 993,000 shares
were available for issuance and purchase at December 31, 1998.
At December 31, 1998, the Company has outstanding 3,264,089 warrants and
754,000 options to consultants and five non-management directors at prices
ranging from $2.00 to $18.00, expiring from 1999 to 2008. In 1998, 100,000
warrants and 87,000 options expired. Included in the above are 125,000 warrants
issued to a consultant 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 Common Stock at the date of grant. The remaining options and warrants
were issued at fair market value at the date of grant.
F-22
<PAGE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("FAS 123") for its stock options plans for employees. Had compensation cost for
these plans been determined under FAS 123, the Company's net loss would have
been increased to $20,192,000 and $24,898,000 with a net loss per common share
of $2.20 and $3.22 for years ended December 31, 1998 and October 31, 1997,
respectively. There were no options granted in the two-month period ended
December 31, 1997. For purposes of this calculation, the fair value of each
option grant was estimated on the grant date using the Black-Scholes
option-pricing model with the following assumptions: expected volatility of
between 43-77 percent; weighted average risk free interest rate of between
5.08-6.35 percent; and weighted average expected lives of 1 to 5 years. All
options granted to date under the stock option plans for employees have an
exercise price equal to the market price of the Company's stock on the grant
date.
In addition, the Company has recorded charges to earnings for years ended
December 31, 1998 and October 31, 1997 of $322,000 and $2,750,000 respectively,
representing the value of the options and warrants issued to consultants. The
Company also incurred a charge of $543,000 in the two-month period ended
December 31, 1997 as a result of extending option expriation dates to terminated
employees of the GTD. These charges have been computed using the Black-Scholes
option-pricing model.
R. Employee Benefit Plan
- - -------------------------
The Company has a 401(k) plan which allows all eligible employees to defer
up to 17% of their pre-tax income through contributions to the plan. The plan
allows for a 1% base annual salary Company matching contribution for each
eligible employee. The Company's contribution was $51,000 for fiscal year 1998,
$23,000 for the two-month period ended December 31, 1997 and $34,000, and
$26,000 in fiscal years 1997 and 1996, respectively.
S. Discontinued Operations
- - ---------------------------
On October 27, 1997 the Company entered into an agreement to sell the GTD
to Strategic Technology Systems, Inc. ("Strategic"). The sale between the
Company and Strategic was closed on December 31, 1997. Accordingly, the
operating results of the Government Technology Division have been segregated
from continuing operations and reported as a separate line item on the
consolidated statements of operations for all periods presented.
Results of operations of the GTD are as follows:
<TABLE>
<CAPTION>
Two Month Ended Year Ended Year Ended
December 31, 1997 October 31, 1997 October 31, 1996
----------------- ---------------- ----------------
<S> <C> <C> <C>
Net revenues $ -- $ 9,981 $ 13,329
Cost and expenses 222 14,835 14,238
</TABLE>
<PAGE>
The net loss on disposal of $1,173,000 for the year ended October 31, 1997
included a provision for estimated losses of the GTD of $1,068,000 through the
date of sale. The actual expenses of the GTD through the date of the sale
exceeded the provision for estimated losses by $222,000.
In accordance with the agreement between the Company and Strategic, and in
consideration for the value of the net assets sold, the Company received
$3,500,000 in cash, and an unsecured promissory note in a principal amount of
$1,975,000. The note has a five year term bearing interest at a rate of 7.5% per
annum. Principal payments under the note amortize over a three year period
beginning on the second anniversary of the closing which was December 31, 1997.
The terms of the note also provide for accelerated payments of principal and
interest pending the occurrence of certain events.
The Company also received a warrant from Strategic exercisable for that
number of shares of the voting common stock as equals 5% of issued and
outstanding shares of common stock and common stock equivalents immediately
following and giving effect to any initial underwritten public offering by
Strategic, with respect to which there can be no assurance. In the event that
Strategic 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 above will be
canceled.
The Company has subleased to Strategic approximately 30,000 square feet
plus allowed the use of 10,000 square feet of common areas for a period of five
years at an annual rental of $240,000 for the first three years and $264,000 per
year for the last two years of the sublease.
F-23
<PAGE>
T. Comprehensive Income (Loss)
- - -------------------------------
The accumulated balances for each classification of comprehensive income
(loss) are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Accumulated
Unrealized Other
Foreign Gains on Comprehensive
Currency Items Securities Income (loss)
-------------- ---------- -------------
<S> <C> <C> <C>
Balance October 31, 1996 $ (159) $ 49 $ (110)
FY 1997 change 9 94 103
Balance October 31, 1997 (150) 143 (7)
========== ========= ============
1997 Transition Period change (45) (81) (126)
Balance December 31, 1997 (195) 62 (133)
========== ========= ============
FY 1998 change (55) (8) (63)
Balance December 31, 1998 $ (250) $ 54 $ (196)
========== ========= ============
</TABLE>
U. Subsequent Events
- - ---------------------
Equity Transactions
-------------------
Subsequent to year-end, on March 5, 1999, the outstanding Series A
Preferred Shares were exchanged for Series B Preferred Shares. See Note N to the
Consolidated Financial Statements. As a result, 15,203 shares of Series B
Preferred Stock, with a principal amount of $15,203,000 were exchanged for the
outstanding shares of Series A Preferred Stock. In addition, 632,000 new
Warrants were issued to the Series B Preferred Stockholders, and 720,000
Warrants were issued to replace certain original Warrants issued in December
1997. The Series B Preferred Stock and Warrants will be recorded at their
estimated fair value. The Company is in the process of finalizing such fair
values and the amounts, if any, of noncash charges or credits.
At the November 10, 1998 shareholders' meeting, a proposal was approved
to authorize the Company to decrease the conversion price of the $10 million
Convertible Subordinated Debenture from $12.50 to $4.00 per share of Class A
Common Stock upon conversion of the debenture. On March 5, 1999, the holder
converted this $10 million debenture into 2.5 million shares of Class A Common
Stock which increased shareholders' equity by approximately $9.6 million
including a non-cash charge of approximately $5.5 million.
F-24
<PAGE>
The following unaudited pro-forma condensed balance sheet represents the
effect of the conversion of the $10 million of convertible debentures and
write-off of $393,000 in unamortized debenture issuance costs as if it had
occurred as of December 31, 1998, the effective date of the definitive agreement
as described above. This unaudited pro-forma condensed balance sheet has been
prepared for comparative purposes only (dollars in thousands).
<TABLE>
<CAPTION>
Actual as of Pro-forma as
December 31, of December
1998 31, 1998
(Audited) (Unaudited)
--------- -----------
<S> <C> <C>
Total current assets 20,448 20,448
---------- -----------
Property, plant and equipment, net 5,026 5,026
Note receivable 1,975 1,975
Other assets 6,372 5,979
---------- ----------
Total Assets $ 33,821 $ 33,428
========== ===========
Current liabilities $ 4,966 $ 4,966
---------- -----------
Long-term debt 10,000 --
Other long-term liabilities 3,569 3,569
---------- -----------
Total long-term liabilities 13,569 3,569
---------- -----------
Redeemable Preferred Stock 12,914 12,914
---------- -----------
Shareholders' equity 2,372 11,979
---------- -----------
Total liabilities, redeemable
preferred stock and shareholders' equity $ 33,821 $ 33,428
========== ===========
</TABLE>
Almedica Technology Group Acquisition
-------------------------------------
On March 16, 1999, the Company's Board of Directors agreed to proceed
with negotiations for the acquisition of Almedica Technology Group (Almedica), a
wholly owned subsidiary of Almedica International, Inc. in a stock transaction.
Almedica develops clinical label and materials management software for the
pharmaceutical industry essential to the management of clinical trials. The
acquisition, which is subject to the negotiation of final terms and related
execution of a definitive agreement, is expected to close before the end of
May 1999. Unaudited selected financial information for Almedica for the years
ended August 31, 1998 and 1997 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended Year Ended
August 31, 1998 August 31, 1997
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Sales $ 1,815 $ 1,604
Net income (560) (578)
----- -----
Total assets 1,195 1,397
Stockholders' equity 145 456
----- -----
</TABLE>
<PAGE>
Select Software Tools Acquisition
---------------------------------
On March 16, 1999, the Company's Board of Directors approved the
commencement of preliminary discussions which could lead to an acquistion of
Select Software Tools, plc (NASDAQ: SLCTY) ("Select") in a stock transaction.
Also, in connection with these preliminary discussions with Select, the Company
agreed to loan Select up to $1.0 million. The acquisition is subject to the
negotiation of final terms and execution of a definitive purchase agreement, and
the approval of Select stockholders.
On March 26, 1999, the Company loaned $700,000 to Select under a promissory
note. Unaudited selected financial information for Select for the nine months
ended September 30, 1998 and the year ended December 31, 1997 are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Sales $ 19,439 $ 25,012
Net loss (12,074) (8,080)
------- ------
Total assets 17,618 21,891
Stockholders' equity (246) 11,677
---- ------
</TABLE>
F-25
<PAGE>
The Company believes that Select took certain restructuring actions in the
second half of 1998 and early 1999 in an effort to significantly reduce its
expense base. Select has informed the Company that they have identified certain
possible additional cost reductions which are intended to bring Select to
break-even by closing or shortly after the date of acquisition by Base Ten. If
the Select acquisition occurs, depending on net liabilities of Select, assumed
by the Company at the date of acquisition, if any, and on the success of these
cost reduction efforts, in bringing Select to net positive cashflow, the Company
may need to acquire additional funding in 1999. However, no assurances can be
given that the acquisition will occur and, if it does, whether additional
required funds would be available to Base Ten when needed.
F-26
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, this 15th day of
April, 1999.
Base Ten Systems, Inc.
<TABLE>
<CAPTION>
<S> <C> <C>
By: THOMAS E. GARDNER By: WILLIAM F. HACKETT By: WILLIAM F. HACKETT
- - --------------------------- -------------------------- --------------------------
Thomas E. Gardner William F. Hackett William F. Hackett
Chief Executive Officer Chief Financial Officer Principal Accounting Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the date indicated.
Title Date
Directors April 15, 1999
Alexander M. Adelson
Thomas E. Gardner
Alan S. Poole
Carl W. Schafer
William Sword
By: WILLIAM F. HACKETT
- - ---------------------------------------------
William F. Hackett, as attorney-in-fact
<PAGE>
<TABLE>
<CAPTION>
Exhibit Index
Exhibit Number Exhibit Page
-------------- ------ ----
<S> <C> <C> <C>
2. (a) Asset Purchase Agreement between Registrant and * (A)
Strategic Technology Systems, Inc.
dated October 27, 1997, (incorporated by
reference to Exhibit 2.1 of Registrant's Current
Report on Form 8-K (File No. 0-7100) dated
November 17, 1997).
(b) Asset Purchase Agreement dated as of February 19, *
1998 by and among Base Ten FlowStream, Inc.,
Base Ten Systems, Inc. and Consilium, Inc.
(incorporated by reference to Exhibit 2(b) to
Registrants' Current Report on Form 8-K (File No.
0-7100) dated March 6, 1998).
3. (a) Restated Certificate of Incorporation, as amended, *
of Registrant (incorporated by reference to
Exhibit 4(a) to Amendment No. 1 to Registrant's
Registration Statement on Form S-8
(File No. 2-84451) filed on July 31, 1990).
(b) Certificate of Amendment of the Restated *
Certificate of Incorporation dated September 1,
1992 (incorporated by reference to Exhibit
4(b)(2) to Amendment No. 3 to Registrant's
Registration Statement on Form S-1 (File No.
33-48404) filed on September 3, 1992).
(c) Amended By-Laws of the Registrant (incorporated *
by reference to Exhibit 4(d)(2) to Registrant's
Registration Statement on Form S-8 (File No.
33-60454) filed on April 1, 1993).
(d) Certificate of Amendment of Restated Certificate *
of Incorporation filed December 2, 1997,
(incorporated by reference to Exhibit 99.3 of
Registrant's Current Report on Form 8-K (File No.
0-7100) dated October 27, 1997).
(e) Amended By-laws of Registrant dated October 13, *
1997 (incorporated by reference to Exhibit
10(ee) to Registrant's Annual Report on Form 10-K
(File No. 0-7100) for the fiscal year ended
October 31, 1997).
(f) Amendment to Certificate of Incorporation filed *
on March 31, 1998 (incorporated by reference to
Exhibit 3(d) to Registrants' Current Report on
Form 8-K (File No. 0-7100) dated April 23, 1998).
(g) Amendment to Certificate of Incorporation filed *
on April 21, 1998 (incorporated by reference to
Exhibit 3(e) to Registrants' Current Report on
Form 8-K (File No. 0-7100) dated April 23, 1998).
(h) Certificate of Amendment of Certificate of *
Incorporation dated June 30, 1998 filed with
the Treasurer of the State of new Jersey on July
9, 1998 (incorporated by reference to Exhibit
3(g) to Registrants' Current Report on Form 8-K
(File No. 0-7100) dated January 13, 1999).
(i) Certificate of Amendment of Certificate of *
Incorporation dated September 30, 1998 filed
with the Treasurer of the State of New Jersey on
October 13, 1998 (incorporated by reference to
Exhibit 3(h) to Registrants' Current Report on
Form 8-K (File No. 0-7100) dated January 13,
1999).
(j) Certificate of Amendment of Certificate of *
Incorporation dated November 18, 1998 filed
with the Treasurer of the State of new Jersey on
November 19, 1998 (incorporated by reference to
Exhibit 3(i) to Registrants' Current Report on
Form 8-K (File No. 0-7100) dated January 13,
1999).
(k) Certificate of Amendment of Certificate of *
Incorporation dated January 11, 1999 filed with
the Treasurer of the State of new Jersey on
January 11, 1999 (incorporated by reference to
Exhibit 3(j) to Registrants' Current Report on
Form 8-K (File No. 0-7100) dated January 13,
1999).
(l) Form of Certificate of Amendment of Restated *
Certificate of Incorporation providing for
designation, preferences and rights of the
Convertible Preferred Shares, Series B (Exhibit A
to the Exchange Agreement dated as of December
31, 1998) (incorporated by reference to Exhibit
10(yy) to Registrants' Current Report on Form 8-K
(File No. 0-7100) dated January 13, 1999).
(m) Certificate of Amendment of Certificate of
Incorporation dated March 3, 1999 filed with the
Treasurer of the State of New Jersey on March
4, 1999.
(n) Certificate of Correction to the Certificate of
Amendment of Restated Certificate of
Incorporation providing for designation,
preferences and rights of the Convertible
Preferred Shares, Series B, filed with the
Treasurer of the State of New Jersey on March 18,
1999.
4. (a) Purchase Agreement filed as of August 8, 1996 *
between the Registrant and Jesse L. Upchurch
(incorporated by reference to Exhibit 4 (a) to
Registrant's Current Report on Form 8-K (File No.
0-7100) dated August 12, 1996).
10. (a) 1980 Deferred Compensation Agreement between * (A)
the Registrant and certain executive
officers (incorporated by reference to Exhibit
10.3 to Registrant's Registration Statement on
Form S-1 File No. 2-70259 filed on December 16,
1980).
(b) 1981 Incentive Stock Option Plan of Registrant, * (A)
as amended and restated on January 12, 1990
(incorporated by reference to Exhibit 4(c) to
Amendment No. 1 to Registrant's Registration
Statement on Form S-8 (File No. 2-84451) filed on
July 31, 1990).
(c) 1992 Stock Option Plan of Registrant * (A)
(incorporated by reference to Exhibit 10(ai) to
Amendment No. 3 to Registrant's Registration
Statement on Form S-1 (File No.
33-48404) filed on September 3, 1992).
(d) Change in Control Agreement dated October 23, * (A)
1991 between Registrant and Myles M.
Kranzler (incorporated by reference to Exhibit
10(e) to Registrant's Annual Report on Form 10-K
(File No. 0-7100) for the fiscal year ended
October 31, 1991).
<PAGE>
Exhibit Index (Continued)
Exhibit Number Exhibit Page
-------------- ------- ----
(e) Change in Control Agreement dated October 23, * (A)
1991 between Registrant and James A. Eby
(incorporated by reference to Exhibit 10(f)
to Registrant's Annual Report on Form 10-K (File
No. 0-7100) for the fiscal year ended October 31,
1991).
(f) Change in Control Agreement dated October 23, * (A)
1991 between Registrant and Edward J.
Klinsport (incorporated by reference to Exhibit
10(f) to Registrant's Annual Report on Form 10-K
(File No. 0-7100) for the fiscal year ended
October 31, 1991).
(g) Employment Agreement dated as of March 26, 1992 * (A)
between the Registrant and Myles M.
Kranzler (incorporated by reference to Exhibit
28(b) to Registrant's Current Report on Form 8-K
(File No. 0-7100) filed on April 10, 1992).
(h) Employment Agreement dated as of March 26, 1992 * (A)
between the Registrant and James A. Eby
(incorporated by reference to Exhibit 28(c) to
Registrant's Current Report on Form 8-K (File No.
0-7100) filed on April 10, 1992).
(i) Employment Agreement dated as of March 26, 1992 * (A)
between the Registrant and Edward J.
Klinsport (incorporated by reference to Exhibit
28(d) to Registrant's Current Report on Form 8-K
(File No. 0-7100) filed on April 10, 1992).
(j) Employment Agreement dated as of March 26, 1992 * (A)
between the Registrant and Alan J.
Eisenberg (incorporated by reference to Exhibit
28(e) to Registrant's Current Report on Form 8-K
(File No. 0-7100) filed on April 10, 1992).
(k) Amended Agreement dated July 28, 1992 between the * (A)
Registrant and Alexander Adelson
(incorporated by reference to Exhibit 10(ar) to
the Registrant's Registration Statement on
Amendment No. 3. to Form S-2 on Form S-1
(Registration No. 33-48404) filed on September 3,
1992).
(l) Modification of Amended Agreement dated January * (A)
11, 1993 between the Registrant and
Alexander M. Adelson.
(m) Amended Modification of Amended Agreement dated * (A)
January 28, 1994 between the
Registrant and Alexander M. Adelson.
(n) Amended Consulting Agreement made as of February * (A)
24, 1992 between the Registrant and Bruce
D. Cowen (incorporated by reference to Exhibit
10(as) to the Registrant's Registration Statement
on Amendment No. 3. to Form S-2 on Form S-1
(Registration No. 33-48404) filed on
September 3, 1992).
(o) Modification of Amendment Agreement dated January * (A)
11, 1993 between the Registrant and Bruce D.
Cowen.
(p) Consulting Agreement dated March 1, 1994 * (A)
between the Registrant and Bruce D. Cowen.
(q) Option Agreement dated as of November 9, 1992 *
between the Registrant and Donald M. Daniels
(incorporated by reference to Exhibit
10(as) to the Registrant's Annual Report on Form
10-K (File No. 0-7100) for the fiscal year ended
October 31, 1992).
(r) Option Agreement dated as of June 5, 1992 between *
the Registrant and Strategic Growth
International, Inc. (incorporated by reference to
Exhibit 10(at) to the Registrant's Annual Report
on Form 10-K (File No. 0-7100) for the fiscal
year ended October 31, 1992).
(s) Acquisition Agreement dated October 28, 1994 *
between the Registrant and CKR Partners, L.L.C.
(incorporated by reference to Exhibit 2(a) to
Registrant's Current Report on Form 8-K (File No.
0-7100) dated November 11, 1994).
(t) Lease dated October 28, 1994 between the *
Registrant and CKR Partners, L.L.C.
(incorporated by reference to Exhibit 10(b) to
Registrant's Current Report on Form 8-K (File No.
0-7100) dated November 11, 1994).
(u) Operating Agreement between the Registrant and *
Jesse L. Upchurch dated May 1, 1997
(incorporated by reference to Exhibit (u) of
Registrant's Current Report on Form 8-K (File No.
0-7100) dated May 1, 1997).
(v) License and Services Agreement between the *
Registrant and uPACS, L.L.C. dated May 1, 1997,
(incorporated by reference to Exhibit 10(v) of
Registrant's Current Report Form 8-K (File No.
0-7100) dated May 1, 1997).
(w) Compensation Agreement among uPACS, L.L.C., * (A)
Andrew Garret, Inc. and Andrew Sycoff dated
May 1, 1997, (incorporated by reference to
Exhibit 10(w) of Registrant's Current Report on
Form 8-K (file No. 0-7100) dated May 1, 1997).
(x) Securities Purchase Agreement between the *
Registrant and certain purchasers dated May 30,
1997, (incorporated by reference to Exhibit 99.1
of Registrant's Current Report on Form 8-K (File
No. 0-7100) dated May 30, 1997).
(y) Convertible Term Debenture issued by the *
Registrant to certain purchasers dated May 30,
1997, (incorporated by reference to Exhibit 99.2
of Registrant's Current Report on Form 8-K (File
No. 0-7100) dated May 30, 1997).
(z) Stock Purchase Warrant issued by the Registrant *
to certain purchases dated May 30, 1997,
(incorporated by reference to Exhibit 99.3 of
Registrant's Current Report on Form 8-K (File No.
0-7100) dated May 30, 1997).
(aa) Registration Rights Agreement between the *
Registrant and certain purchasers dated May 30,
1997, (incorporated by reference to Exhibit 99.4
of Registrant's Current Report on Form 8-K (File
No. 0-7100) dated May 30, 1997).
(bb) Securities Purchase Agreement between the *
Registrant and certain purchasers dated
December 4, 1997, (incorporated by reference to
Exhibit 99.1 of Registrant's Current Report on
Form 8-K (File No. 0-7100) filed dated December
9, 1997).
(cc) Registration Rights Agreement between the *
Registrant and certain purchasers dated
December 4, 1997, (incorporated by reference to
Exhibit 99.1 of registrant's Current Report on
Form 8-K (File No, 0-7100) dated May 30 filed
December 9, 1997).
(dd) Common Stock Purchase Warrant issued by *
Registrant and certain purchasers dated
December 4, 1997 (incorporated by reference to
Exhibit 99.4 of Registrant's Current Report Form
8-K (File No. 07100) dated December 9, 1997).
(ee) Warrant Agreement between Registrant and * (A)
Strategic Growth International dated April
15, 1997 (incorporated by reference to Exhibit
10(ee) to Registrant's Annual Report on Form 10-K
(File No. 0-7100) for the fiscal year ended
October 31, 1997).
(ff) Consultant Agreement between Registrant and RTS * (A)
Research Lab, Inc., dated June 9, 1997
(incorporated by reference to Exhibit 10(ff) to
Registrant's Annual Report on Form 10-K (File No.
0-7100) for the fiscal year ended October 31,
1997).
(gg) Warrant Agreement between Registrant and * (A)
Strategic Growth International, Inc. dated
June 20, 1997 (incorporated by reference to
Exhibit 10(gg) to Registrant's Annual
Report on Form 10-K (File No. 0-7100) for the
fiscal year ended October 31, 1997).
(hh) Option Agreement between Registrant and David C. * (A)
Batten dated October 13, 1997 (incorporated
by reference to Exhibit 10(hh) to Registrant's
Annual Report on Form 10-K (File No. 0-7100) for
the fiscal year ended October 31, 1997).
(ii) Option Agreement between Registrant and Alan S. * (A)
Poole dated October 13, 1997 (incorporated
by reference to Exhibit 10(ii) to Registrant's
Annual Report on Form 10-K (File No. 0-7100) for
the fiscal year ended October 31, 1997).
(jj) Employment Agreement between Registrant and * (A)
Thomas E. Gardner dated October 17, 1997
(incorporated by reference to Exhibit 10(jj) to
Registrant's Annual Report on Form 10-K (File No.
0-7100) for the fiscal year ended October 31,
1997).
(kk) Change of Control Agreement between Registrant * (A)
and Thomas E. Gardner dated October 17, 1997
(incorporated by reference to Exhibit 10(kk) to
Registrant's Annual Report on Form 10-K (File No.
0-7100) for the fiscal year ended October 31,
1997).
(ll) Performance-Based Stock Option Agreement between * (A)
Registrant and Thomas E. Gardner dated
October 17, 1997 (incorporated by reference to
Exhibit 10(ll) to Registrant's Annual Report on
Form 10-K (File No. 0-7100) for the fiscal year
ended October 31, 1997).
(mm) Service-Based Stock Option Agreement between *
Registrant and Thomas E. Gardner dated October
17, 1997 (incorporated by reference to Exhibit
10(mm) to Registrant's Annual Report on Form 10-K
(File No. 0-7100) for the fiscal year ended
October 31, 1997).
(nn) Separation and Consulting Agreement between * (A)
Registrant and Myles M. Kranzler dated
October 20, 1997 (incorporated by reference to
Exhibit 10(nn) to Registrant's Annual Report on
Form 10-K (File No. 0-7100) for the fiscal year
ended October 31, 1997).
(oo) Omnibus Convertible Term Debenture Holder Waiver *
and Consent Regarding Sale of the
Government Technology Division and Amendment No.
1 to Convertible term Debenture
between Registrant and RGC International
Investors, LDC and the Tail Wind Fund,
LTD., dated October 20, 1997 (incorporated
by reference to Exhibit 10(oo) to
Registrant's Annual Report on Form 10-K (File No.
0-7100) for the fiscal year ended
October 31, 1997).
(pp) Employment Agreement between Registrant and C. * (A)
Richard Bagshaw dated November 26, 1997
(incorporated by reference to Exhibit 10(pp) to
Registrant's Annual Report on Form 10-K (File No.
0-7100) for the fiscal year ended October 31,
1997).
(qq) Promissory Note from Strategic Technology *
Systems, Inc., to Registrant dated December 31,
1997 (incorporated by reference to Exhibit 10(gg)
to Registrant's Annual Report on Form 10-K (File
No. 0-7100) for the fiscal year ended October 31,
1997).
<PAGE>
(rr) Warrant Agreement between Registrant and *
Strategic Technology Systems, Inc., dated
December 31, 1997 (incorporated by reference to
Exhibit 10(rr) to Registrant's Annual Report on
Form 10-K (File No. 0-7100) for the fiscal year
ended October 31, 1997).
(ss) Transition Agreement between Registrant and *
Strategic Technology Systems, Inc., dated
December 31, 1997 (incorporated by reference to
Exhibit 10(ss) to Registrant's Annual Report on
Form 10-K (File No. 0-7100) for the fiscal year
ended October 31, 1997).
(tt) Sublease between Registrant and Strategic *
Technology Systems, Inc., dated December 31,
1997 (incorporated by reference to Exhibit 10(tt)
to Registrant's Annual Report on Form 10-K (File
No. 0-7100) for the fiscal year ended October 31,
1997).
(uu) Fifth Amendment to Lease between Registrant and *
CKR PARTNERS, L.L.C., dated December 31, 1997
(incorporated by reference to Exhibit 10(uu) to
Registrant's Annual Report on Form 10-K (File No.
0-7100) for the fiscal year ended October 31,
1997).
(vv) Consulting Agreement between Registrant and * (A)
Edward J. Klinsport dated December 31, 1997
(incorporated by reference to Exhibit 10(vv) to
Registrant's Annual Report on Form 10-K (File No.
0-7100) for the fiscal year ended October 31,
1997).
(ww) Stock Purchase Agreement dated as of November *
12, 1998 by and between Base Ten
Systems, Inc. and Jesse L. Upchurch
(incorporated by reference to Exhibit 3(d) to
Registrants' Current Report on Form 8-K (File No.
0-7100) dated November 20, 1998).
(xx) Exchange Agreement dated as of December 31, 1998 *
by and between Base Ten Systems, Inc. and the
holders of the outstanding Series A, Convertible
Preferred Stock (incorporated by reference to
Exhibit 10(xx) to Registrants' Current Report on
Form 8-K (File No. 0-7100) dated January 13,
1999).
(yy) Form of Certificate of Amendment of Restated *
Certificate of Incorporation providing for
designation, preferences and rights of the
Convertible preferred Shares, Series B (Exhibit A
to the Exchange Agreement dated as of December
31, 1998) (incorporated by reference to Exhibit
10(yy) to Registrants' Current Report on Form 8-K
(File No. 0-7100) dated January 13, 1999).
(zz) Form of Common Stock Purchase Warrant Certificate *
(Exhibit B to the Exchange Agreement dated as
of December 31, 1998) (incorporated by reference
to Exhibit 10(zz) to Registrants' Current Report
on Form 8-K (File No. 0-7100) dated January 13,
1999).
(aaa) Form of Common Stock Purchase Warrant Certificate *
Exhibit C to the Exchange Agreement dated as
of December 31, 1998) (incorporated by reference
to Exhibit 10(aaa) to Registrants' Current Report
on Form 8-K (File No. 0-7100) dated January 13,
1999).
(bbb) Irrevocable Consent dated December 22, 1998 by *
the holder of the Company's 9.01% Convertible
Subordinated Debentures (incorporated by
reference to Exhibit 10(bbb) to Registrants'
Current Report on Form 8-K (File No. 0-7100)
dated January 13, 1999).
(ccc) Offer Letter by the Registrant to C. Richard (A)
Bagshaw dated November 26, 1997.
(ddd) Change in Control Agreement between the (A)
Registrant and C. Richard Bagshaw dated January
13, 1998.
(eee) Offer Letter by the Registrant to William F. (A)
Hackett dated December 8, 1997.
(fff) Change in Control Agreement between the (A)
Registrant and William F. Hackett dated May 26,
1998.
<PAGE>
21. Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
23.2 Independent Auditors' Consent.
24.1 Power of Attorney.
27.1 Financial Data Schedule for the fiscal year-
ended December 31, 1998, submitted to the
Securities and Exchange Commission in electronic
format.
27.2 Restated Financial Data Schedule for the two
month period from November 1, 1997 to
December 31, 1997 submitted to the Securities and
Exchange Commission in electronic format.
</TABLE>
- - ---------------
* Incorporated by reference.
(A) A management contract or compensatory plan or arrangement.
BASE TEN SYSTEMS, INC.
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION 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 Certificate of
Incorporation in accordance with Section 14A:7-2 and 14A:7-18 of Chapter 7 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 of
the Board of Directors duly held on March 3, 1999, adopted resolutions (attached
as Appendix A hereto) providing for the issuance of 261.4881103516 shares of
Convertible Preferred Shares, Series A and the related increase in the
authorized number of Convertible Preferred Shares, Series A.
THIRD: After giving effect to the issuance of 261.4881103516 shares
of the Corporation's Convertible Preferred Shares, Series A, 15,203.66584473 of
the Preferred Shares shall be Convertible Preferred Shares, Series A.
FOURTH: The Corporation's Certificate of Incorporation is amended as
follows:
Article 6(d)(A) of the Certificate of Incorporation of the
Corporation be amended to read, in its entirety, as follows:
"(d) A. Designation and Amount. The shares of this series of
Preferred Shares shall be designated as "Convertible Preferred
Shares, Series A" and the number of shares constituting such series
shall be 15,203.66584473, with a par value of $1.00 per share.
Fractional Preferred Shares shall be permitted. 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 purposes of
issuance pursuant to Section C(1) hereof."
FIFTH: The action of the Board of Directors in amending Article
6(d)(A) of the Certificate of Incorporation is made pursuant to Section
14A:7-2(2), at a meeting of the Board of Directors duly held on March 3, 1999.
SIXTH: This Certificate of Amendment shall become effective upon
filing.
IN WITNESS WHEREOF, Base Ten Systems, Inc. has caused its duly
authorized officer to execute this Certificate on this 3rd day of March, 1999.
BASE TEN SYSTEMS, INC.
THOMAS E. GARDNER
By:_______________________________
Thomas E. Gardner
President and
Chief Executive Officer
Attest:
WILLIAM F. HACKETT
By:______________________________
William F. Hackett
Secretary
<PAGE>
APPENDIX A
RESOLUTIONS
1. WHEREAS, the Board proposes to pay dividends due on March 4, 1999 on
the Company's Convertible Preferred Shares, Series A, in Convertible
Preferred Shares, Series A, in accordance with Article 6, Section
C(1) of the Certificate of Incorporation, which would have the effect
of increasing the authorized number of Convertible Preferred Shares,
Series A, by 261.4881103516 shares; and
WHEREAS, the effect of paying dividends on the Convertible Preferred
Shares, Series A, in 261.4881103516 shares thereof and the related
increase in the authorized number of Preferred Shares, Series A, is
the increase of the authorized number of Convertible Preferred
Shares, Series A, from 14,942.17773437 to 15,203.66584473 shares; and
be it
RESOLVED, that the Board hereby approves the payment of dividends due
on March 4, 1999 on the Company's Convertible Preferred Shares,
Series A, payable in Convertible Preferred Shares, Series A, in
accordance with Article 6, Section C(1) of the Certificate of
Incorporation, and the increase in the authorized number of
Convertible Preferred Shares, Series A, by 261.4881103516 shares; and
be it
FURTHER RESOLVED, that Article 6(d)(A) of the Certificate of
Incorporation of the Company be amended to read, in its entirety, as
follows:
"(d) A. Designation and Amount. The shares of this series of
Preferred Shares shall be designated as "Convertible Preferred
Shares, Series A" and the number of shares constituting such series
shall be 15,203.66584473, with a par value of $1.00 per share.
Fractional Preferred Shares shall be permitted. 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 purposes of
issuance pursuant to Section C(1) hereof."
2. RESOLVED, that the Board hereby authorizes, directs and empowers each
of Thomas E. Gardner and William F. Hackett, to act individually or
jointly on behalf of the Company to execute and deliver the amendment
to the Certificate of Incorporation of the Company to effect the
foregoing resolutions.
CERTIFICATE OF CORRECTION OF
CERTIFICATE OF AMENDMENT OF
RESTATED CERTIFICATE OF INCORPORATION
PROVIDING FOR DESIGNATION, PREFERENCES
AND RIGHTS OF THE
CONVERTIBLE PREFERRED SHARES, SERIES B
(Par Value $1.00 Per Share)
of
BASE TEN SYSTEMS, INC.
Base Ten Systems, Inc. (the "Corporation"), desiring to correct the
Certificate of Amendment of Restated Certificate of Incorporation Providing for
Designation, Preferences and Rights of the Convertible Preferred Shares, Series
B of the Corporation (the "Certificate of Amendment") filed on March 4, 1999,
pursuant to Section 14A:1-6(5) of the New Jersey Business Corporation Act hereby
certifies:
FIRST: The name of the Corporation is Base Ten Systems, Inc.
SECOND: The date of the Exchange Agreement set forth in the Second
Article, Section B--Definitions, Definition of "Exchange Agreement," of the
Corporation's Certificate of Amendment was incomplete as it read "December XX,
1998."
THIRD: The date of the Exchange Agreement set forth in the Second
Article, Section B--Definitions, Definition of "Exchange Agreement," of the
Corporation's Certificate of Amendment is corrected to read "December 31, 1998."
IN WITNESS WHEREOF, the Corporation has caused its duly authorized
officer to execute this Certificate on this 16th day of March, 1999.
BASE TEN SYSTEMS, INC.
WILLIAM F. HACKETT
By:_________________________
William F. Hackett
Senior Vice President
November 26, 1997
Mr. C. Richard Bagshaw
1470 Sand Hill Road, Apt. 310
Palo Alto, California 94304
Dear Rick:
It is a pleasure to extend to you an offer to join Base Ten Systems, Inc. as
Executive Vice President effective December 1, 1997. As you know, Base Ten is in
the process of completing a strategic shift from weapons control systems for the
defense industry to manufacturing execution systems (MES) software for regulated
industries, especially pharmaceutical manufacturers. Your recent experience as
President of Roche-Syntex Pharmaceuticals in Puerto Rico and your many years of
operations, marketing and general management experience lead us to believe that
you will be quite successful in your new role and responsibilities.
Your initial compensation will be as follows:
1. Base Salary - Your base salary will be at the annual rate of $180,000 earned
and paid bi-weekly, in accordance with Base Ten's normal pay policy. You
will be eligible for an annual salary review. Salary action will be based on
merit and performance.
2. Bonus - You will be eligible for a bonus equaling up to 40% of your base
salary. The amount of your bonus will be determined by management based on
your meeting agreed upon performance targets and on the overall performance
of the Company. This bonus will be paid within 120 days after the end of
each fiscal year.
3. Stock Option - We will make best efforts to secure the needed approvals of
the shareholders and of the Board of Directors to authorize additional
shares of Base Ten Class A Common Stock for option purposes and to grant you
an option to purchase 50,000 shares from this proposed authorization. Your
purchase price per share under this option grant would be at the NASDAQ
closing price on the day that your option is granted. Assuming it is
granted, this option will vest 20% on each of the first five anniversaries
from the date of the grant. You will be eligible from time to time for
future grants at the discretion of the Board of Directors.
4. Change of Control Agreement - You will be provided with a change of control
agreement. Should there be a change of control as defined in the Agreement,
your stock options will vest 100% on the date of change of control. Should
your employment subsequently be terminated for convenience following a
change of control as defined in the Agreement you will receive a cash
payment in the amount of 2.99 times your base salary. The change of control
agreement is controlling in these instances.
5. Severance Protection - In accordance with Base Ten policy you can be
separated from the Company at any time for either cause or convenience.
Should your employment be terminated by the Company for convenience you will
receive salary continuation for a period of twelve months. Should your
employment be terminated by the Company for cause there will be no severance
pay.
6. Benefits - You will be entitled to the standard package of Base Ten benefits
offered to U. S. exempt employees including eight paid holidays and three
weeks vacation.
7. Relocation Allowance - You will be entitled to a relocation allowance not to
exceed $10,000. This will include up to three months of temporary housing at
a rate not to exceed $1,500 per month, and packing and shipment of your
household goods to the Trenton area. Actual expenditures will be reimbursed.
This offer is contingent upon the fact that there is nothing outstanding,
including any restrictive nondisclosure/noncompetition agreements with or any
obligations to any parties which would prohibit your ability to function in full
as Executive Vice President, and, upon board approval, as an officer of the
Company.
The terms of this letter of offer are governed by the laws of the State of New
Jersey and shall be subject to periodic review. Employment with the Company is
as defined and governed by Company policies and procedures.
Please confirm your acceptance to this offer by signing both this and the
enclosed Agreement with Respect to Inventions, Disclosures and Competition.
Originals should be returned to the attention of Jo Ann Fechter, Personnel
Manager. You may retain the copies for your files.
At Base Ten, Rick, we are exceptionally excited about our growth prospects. We
hope that you choose to accept our offer and look forward to your joining us
early in December.
Sincerely,
RICHARD J. FARRELLY C. RICHARD BAGSHAW
- - ------------------- --------------------------
Richard J. Farrelly C. Richard Bagshaw
Sr. Vice President, Planning and Human Resources
cc: T. E. Gardner
Board of Directors
CHANGE IN CONTROL AGREEMENT
THIS AMENDED AND RESTATED AGREEMENT dated January 13, 1998,
by and between Base Ten Systems, Inc., a New Jersey corporation (together with
any successor, the "Company"), and C. Richard Bagshaw, residing at 6134 Bramble
Court, Lawrenceville, NJ 08648, (the "Executive").
W I T N E S S E T H:
WHEREAS, should the Company receive a proposal from or
engage in discussions with a third person concerning a possible business
combination with or the acquisition of a substantial portion of voting
securities of the Company, the Board of Directors of the Company (the "Board")
has deemed it imperative that it and the Company be able to rely on the
Executive to continue to serve in his position and that the Board and the
Company be able to rely upon his advice as being in the best interests of the
Company and its shareholders without concern that the Executive might be
distracted by the personal uncertainties and risks that such a proposal or
discussions might otherwise create; and
WHEREAS, the Company desires to enhance executive morale
and its ability to retain existing management; and
WHEREAS, the Company desires to reward the Executive for
his service to the Company or one or more of its subsidiary corporations (each
together with any successor, a "Subsidiary") should his service be terminated
under circumstances hereinafter described; and
WHEREAS, the Board therefore considers it in the best
interests of the Company and its shareholders for the Company to enter into
Change in Control Agreements, in form similar to this Agreement, with certain
key executive officers of the Company; and
WHEREAS, the Executive is presently a key executive with
whom the Company has been authorized by the Board to enter into this Agreement;
WHEREAS, as of the date of this Agreement, the specialized
knowledge and skills of the Executive will be particularly needed by the Company
as the Company continues to expand its medical technology business, and
stability at the top management level is and will be critically important to the
ultimate success of the Company; and
WHEREAS, in order to provide an incentive to members of top
management not to seek and consider opportunities outside of the Company, which
would substantially impede the continued expansion of the Company's medical
technology business, while at the same time continuing to engage in its historic
business, the Company's independent directors have determined it to be in the
best interests of the Company to revise and amend this Agreement in order to
make it consistent with the purposes underlying the original entry of this
Agreement;
NOW, THEREFORE, to assure the Company of the Executive's
continued dedication and the availability of his advice and counsel in the event
of any such proposal, to induce the Executive to remain in the employ of the
Company or a Subsidiary, and to reward the Executive for his valuable, dedicated
service to the Company or a Subsidiary should his service be terminated under
circumstances hereinafter described, and for other good and valuable
consideration, the receipt and adequacy whereof each party acknowledges, the
Company and the Executive agree as follows:
1. OPERATION, EFFECTIVE DATE, AND TERM OF AGREEMENT.
(a) This Agreement shall commence on the date hereof and
continue in effect through December 31, 2000; provided, however, that commencing
on January 1, 1999 and each succeeding January 1 thereafter, the term of this
Agreement shall be extended automatically for one additional year (so that at
all times the remaining term hereof shall not be less than two (2) years) unless
not later than the September 30 preceding such automatic extension date the
Company shall have given notice that it does not wish to extend this Agreement.
(b) This Agreement is effective and binding on both parties
as of the date hereof. Notwithstanding its present effectiveness, the provisions
of paragraphs 3 and 4 of this Agreement shall become operative only when, as and
if there has been a "Change in Control of the Company." For purposes of this
Agreement, a "Change in Control of the Company" shall be deemed to have occurred
if
(X) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")), or persons "acting
in concert" (which for purposes of this Agreement shall
include two or more persons voting together on a consistent
basis pursuant to an agreement or understanding between
them), other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company
and other than a person engaging in a transaction of the
type described in clause (Z) of this subsection but which
does not constitute a change in control under such clause,
is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing forty percent (40%)
or more of the combined voting power of the Company's then
outstanding securities; or
(Y) individuals who, as of the date of this
Amended and Restated Agreement, constitute the Board and
any new director ("New Director") whose election by the
Board, or nomination for election by the Company
shareholders, was approved by a vote of at least
seventy-five percent (75%) of the directors then still in
office who either were directors at the beginning of the
period or whose election or nomination for election was
previously so approved ("Continuing Members"), cease for
any reason to constitute a majority thereof (provided that,
for purposes of this clause (Y), the term "New Director"
shall exclude (i) a director designated by a person who has
entered into an agreement with the Company to effect a
transaction described in clauses (X) or (Z) of this
subsection, and (ii) an individual whose initial assumption
of office as a director is in connection with any actual or
threatened contest related to the election of any directors
to the Board); or
(Z) the shareholders of the Company approve or,
if no shareholder approval is required or obtained, the
Company or a Subsidiary completes a merger, consolidation
or similar transaction of the Company or a Subsidiary with
or into any other corporation, or a binding share exchange
involving the Company's securities, other than any such
transaction which would result in the voting securities of
the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or
by being converted into voting securities of the surviving
entity) at least seventy-five percent (75%) of the combined
voting power of the voting securities of the Company or
such surviving entity outstanding immediately after such
transaction, or the shareholders of the Company approve a
plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all or
substantially all the Company's assets (excluding, for this
purpose, the sale of the Company's Government Technology
division).
2. EMPLOYMENT OF EXECUTIVE.
Nothing herein shall affect any right which the Executive
or the Company or a Subsidiary may otherwise have to terminate the Executive's
employment by the Company or a Subsidiary at any time in any lawful manner,
subject always to the Company's providing to the Executive the payments and
benefits specified in paragraphs 3 and 4 of this Agreement to the extent
hereinbelow provided.
In the event any person commences a tender or exchange
offer, circulates a proxy statement to the Company's shareholders or takes other
steps designed to effect a Change in Control of the Company as defined in
paragraph 1 of this Agreement, the Executive agrees that, subject to the
provisions of Section 5(a)(iii), (c) and (j) of the Employment Agreement, he
will not voluntarily leave the employ of the Company or a Subsidiary, and will
continue to perform his regular duties and to render the services specified in
the recitals of this Agreement, until such person has abandoned or terminated
his efforts to effect a Change in Control of the Company or until a Change in
Control of the Company has occurred. Should the Executive voluntarily terminate
his employment before any such effort to effect a Change in Control of the
Company has commenced, or after any such effort has been abandoned or terminated
without effecting a Change in Control of the Company and no such effort is then
in process, this Agreement shall lapse and be of no further force or effect.
<PAGE>
3. TERMINATION FOLLOWING CHANGE IN CONTROL.
(a) If any of the events described in paragraph 1 hereof
constituting a Change in Control of the Company shall have occurred, the
Executive shall be entitled to the benefits provided in paragraph 4 hereof upon
the termination of his employment within the applicable period set forth in
paragraph 4 hereof unless such termination is (i) due to the Executive's death;
or (ii) by the Company or a Subsidiary by reason of the Executive's Disability
or for Cause; or (iii) by the Executive other than for Good Reason.
(b) If following a Change in Control of the Company the
Executive's employment is terminated by reason of his death or Disability, the
Executive shall be entitled to death or long-term disability benefits, as the
case may be, from the Company no less favorable than the maximum benefits to
which he would have been entitled had the death or termination for Disability
occurred during the six month period prior to the Change in Control of the
Company. If prior to any such termination for Disability, the Executive fails to
perform his duties as a result of incapacity due to physical or mental illness,
he shall continue to receive his Salary less any benefits as may be available to
him under the Company's or Subsidiary's disability plans until his employment is
terminated for Disability.
(c) If the Executive's employment shall be terminated by
the Company or a Subsidiary for Cause or by the Executive other than for Good
Reason, the Company shall pay to the Executive his full Salary through the Date
of Termination at the rate in effect at the time Notice of Termination is given,
and the Company shall have no further obligations to the Executive under this
Agreement.
(d) For purposes of this Agreement:
(i) "Disability" shall mean the Executive's incapacity due
to physical or mental illness such that the Executive shall
have become qualified to receive benefits under the
Company's or Subsidiary's long-term disability plans or any
equivalent coverage required to be provided to the
Executive pursuant to any other plan or agreement,
whichever is applicable.
(ii) "Cause" shall mean:
(A) the conviction of the Executive for a felony,
or the willful commission by the Executive of a
criminal or other act that in the judgment of the
Board causes or will probably cause substantial
economic damage to the Company or a Subsidiary or
substantial injury to the business reputation of
the Company or a Subsidiary;
(B) the commission by the Executive of an act of
fraud in the performance of such Executive's
duties on behalf of the Company or a Subsidiary
that causes or will probably cause economic
damage to the Company or a Subsidiary; or
(C) the continuing willful failure of the
Executive to perform the duties of such Executive
to the Company or a Subsidiary (other than any
such failure resulting from the Executive's
incapacity due to physical or mental illness)
after written notice thereof (specifying the
particulars thereof in reasonable detail) and a
reasonable opportunity to be heard and cure such
failure are given to the Executive by the
Compensation Committee of the Board with the
approval thereof by a majority of the Continuing
Directors.
For purposes of this subparagraph (d)(ii), no act, or
failure to act, on the Executive's part shall be considered "willful" unless
done, or omitted to be done, by him not in good faith and without reasonable
belief that his action or omission was in the best interests of the Company or a
Subsidiary.
(iii) "Good Reason" shall mean:
(A) The assignment by the Company or a Subsidiary
to the Executive of duties without the
Executive's express written consent, which (i)
are materially different or require travel
significantly more time consuming or extensive
than the Executive's duties or business travel
obligations measured from the point in time one
(1) year prior to the Change in Control of the
Company, or (ii) result in either a significant
reduction in the Executive's authority and
responsibility as a senior corporate executive of
the Company or a Subsidiary when compared to the
highest level of authority and responsibility
assigned to the Executive at any time during the
one (1) year period prior to the Change in
Control of the Company, or, (iii) without the
Executive's express written consent, the removal
of the Executive from, or any failure to
reappoint or reelect the Executive to, the
highest title held since the date one (1) year
before the Change in Control of the Company,
except in connection with a termination of the
Executive's employment by the Company or a
Subsidiary for Cause, or by reason of the
Executive' death or Disability;
(B) A reduction by the Company or a Subsidiary of
the Executive's Salary, or the failure to grant
increases in the Executive's Salary on a basis at
least substantially comparable to those granted
to other executives of the Company or a
Subsidiary of comparable title, salary and
performance ratings made in good faith;
(C) The relocation of the Company's principal
executive offices (or in the case of an employee
of a Subsidiary, the principal executive offices
of such Subsidiary) to a location outside the
State of New Jersey, or the Company's requiring
the Executive to be based anywhere other than the
Company's principal executive offices (or in the
case of an employee of a Subsidiary, the
principal executive officer of such Subsidiary)
except for required travel on the Company's or a
Subsidiary's business to an extent substantially
consistent with the Executive's business travel
obligations measured from the point in time one
(1) year prior to the Change in Control of the
Company, or in the event of any relocation of the
Executive with the Executive's express written
consent, the failure by the Company or a
Subsidiary to pay (or reimburse the Executive
for) all reasonable moving expenses by the
Executive relating to a change of principal
residence in connection with such relocation and
to indemnify the Executive against any loss
realized in the sale of the Executive's principal
residence in connection with any such change of
residence, all to the effect that the Executive
shall incur no loss upon such sale on an after
tax basis;
(D) The failure by the Company or a Subsidiary to
continue to provide the Executive with
substantially the same welfare benefits (which
for purposes of this Agreement shall mean
benefits under all welfare plans as that term is
defined in Section 3(1) of the Employee
Retirement Income Security Act of 1974, as
amended), and perquisites, including
participation on a comparable basis in the
Company's or a Subsidiary's stock option plan,
incentive bonus plan and any other plan in which
executives of the Company or a subsidiary of
comparable title and salary participate and as
were provided to the Executive measured from the
point in time one (1) year prior to such Change
in Control of the Company, or with a package of
welfare benefits and perquisites that is
substantially comparable in all material respects
to such welfare benefits and perquisites; or
(E) The failure of the Company to obtain the
express written assumption of and agreement to
perform this Agreement by any successor as
contemplated in subparagraph 5(d) hereof.
(iv) "Dispute" shall mean (i) in the case of termination of
employment of the Executive with the Company or a
Subsidiary by the Company or a Subsidiary for Disability or
Cause, that the Executive challenges the existence of
Disability or Cause and (ii) in the case of termination of
employment of the Executive with the Company or a
Subsidiary by the Executive for Good Reason, that the
Company or the Subsidiary challenges the existence of Good
Reason.
(v) "Salary" shall mean the Executive's average annual
compensation reported on Form W-2.
(vi) "Incentive Compensation" in any year shall mean the
amount the Executive has elected to defer in such year
pursuant to any plan, arrangement or contract providing for
the deferral of compensation.
(e) Any purported termination of employment by the Company
or a Subsidiary by reason of the Executive's Disability or for Cause, or by the
Executive for Good Reason, shall be communicated by written Notice of
Termination to the other party hereto. For purposes of this Agreement, a "Notice
of Termination" shall mean a notice given by the Executive or the Company or a
Subsidiary, as the case may be, which shall indicate the specific basis for
termination and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for determination of any payments under this
Agreement. The Executive shall not be entitled to give a Notice of Termination
that the Executive is terminating his employment with the Company or a
Subsidiary for Good Reason more than six (6) months following the later to occur
of (i) the Change in Control and (ii) the occurrence of the event alleged to
constitute Good Reason. The Executive's actual employment by the Company or a
Subsidiary shall cease on the Date of Termination specified in the Notice of
Termination, even though such Date of Termination for all other purposes of this
Agreement may be extended in the manner contemplated in the second sentence of
Paragraph 3(f).
(f) For purposes of this Agreement, "Date of Termination"
shall mean the date specified in the Notice of Termination, which shall be not
more than ninety (90) days after such Notice of Termination is given, as such
date may be modified pursuant to the next sentence. If within thirty (30) days
after any Notice of Termination is given, the party who receives such Notice of
Termination notifies the other party that a Dispute (as heretofore defined)
exists, the Date of Termination shall be the date on which the Dispute is
finally determined, either by mutual written agreement of the parties, or by a
final judgment, order or decree of a court of competent jurisdiction (the time
for appeal therefrom having expired and no appeal having been perfected);
provided that the Date of Termination shall be extended by a notice of Dispute
only if such notice is given in good faith and the party giving such notice
pursues the resolution of such Dispute with reasonable diligence and provided
further that pending the resolution of any such Dispute, the Company or a
Subsidiary shall continue to pay the Executive the same Salary and to provide
the Executive with the same or substantially comparable welfare benefits and
perquisites that the Executive was paid and provided as of a date one (1) year
prior to the Change in Control of the Company. Should a Dispute ultimately be
determined in favor of the Company or a Subsidiary, then all sums paid by the
Company or a Subsidiary to the Executive from the date of termination specified
in the Notice of Termination until final resolution of the Dispute pursuant to
this paragraph shall be repaid promptly by the Executive to the Company or a
Subsidiary, with interest at the prime rate generally prevailing from time to
time among major New York City banks and all options, rights and stock awards
granted to the Executive during such period shall be cancelled or returned to
the Company or Subsidiary. The Executive shall not be obligated to pay to the
Company or a Subsidiary the cost of providing the Executive with welfare
benefits and perquisites for such period unless the final judgment, order or
decree of a court or other body resolving the Dispute determines that the
Executive acted in bad faith in giving a notice of Dispute. Should a Dispute
ultimately be determined in favor of the Executive or be settled by mutual
agreement between the Executive and the Company, then the Executive shall be
entitled to retain all sums paid to the Executive under this subparagraph (f)
for the period pending resolution of the Dispute and shall be entitled to
receive, in addition, the payments and other benefits to the extent provided for
in paragraph 4 hereof to the extent not previously paid hereunder.
4. PAYMENTS UPON TERMINATION.
If within three years after a Change in Control of the
Company (or if within nine (9) months prior to a Change in Control if effected
in connection with such Change in Control), the Company or a Subsidiary shall
terminate the Executive's employment other than by reason of the Executive's
death, Disability or for Cause or the Executive shall terminate his employment
for Good Reason then,
(a) The Company or a Subsidiary will pay on the Date of
Termination to the Executive as compensation for services
rendered on or before the Executive's Date of Termination,
a lump sum cash amount (subject to any applicable payroll
or taxes required to be withheld computed at the rate for
supplemental payments) equal to (i) 2.99 times the sum of
the average for each of the five fiscal years of the
Company ending before the day on which the Change in
Control of the Company occurs of the Executive's Salary,
his Incentive Compensation and the annual cost to the
Company of all hospital, medical and dental insurance, life
insurance, disability insurance and other welfare or
benefit plan provided to the Executive minus (ii) the cost
to the Company of the insurance required under subparagraph
4(b) hereof;
(b) For a period of three years following the Date of
Termination, the Company shall provide, at Company expense,
the Executive and the Executive's spouse with full
hospital, medical and dental insurance with substantially
the same coverage and benefits as were provided to the
Executive immediately prior to the Change in Control of the
Company; and
(c) In event that any payment or benefit received or to be
received by the Executive pursuant to this Agreement in
connection with a Change in Control of the Company or the
termination of the Executive's employment (collectively
with all payments and benefits hereunder, "Total Payments")
would not be deductible in whole or in part by the Company
as the result of Section 280G of the Internal Revenue Code
of 1986, as amended and the regulations thereunder (the
"Code"), the payments and benefits hereunder shall be
reduced until no portion of the Total Payments is not
deductible by reducing to the extent necessary the payment
under subparagraph (a) hereof. For purposes of this
limitation (i) no portion of the Total Payments the receipt
or enjoyment of which the Executive shall have effectively
waived in writing prior to the date of payment shall be
taken into account, (ii) no portion of the Total Payments
shall be taken into account which in the opinion of tax
counsel selected by the Executive and acceptable to the
Company's independent auditors the Executive is not likely
to constitute a "parachute payment" within the meaning of
Section 280G(b)(2) of the Code, and (iii) the value of any
non-cash benefit or any deferred payment or benefit
included in the Total Payments shall be determined by the
Company's independent auditors in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code.
<PAGE>
5. GENERAL.
(a) The Executive shall retain in confidence any
proprietary or other confidential information known to him concerning the
Company and its business (including the Company's Subsidiaries and their
businesses) so long as such information is not publicly disclosed and disclosure
is not required by an order of any governmental body or court.
(b) If litigation or other proceedings shall be brought to
enforce or interpret any provision contained herein, or in connection with any
tax audit to the extent attributable to the application of Section 4999 of the
Code to any payment or benefit provided hereunder, the Company shall indemnify
the Executive for his reasonable attorney's fees and disbursements incurred in
connection therewith (which indemnification shall be made at regular intervals
during the course of such litigation, not less frequently than every three (3)
months) and pay prejudgment interest on any money judgment obtained by the
Executive calculated at the prime rate of interest generally prevailing from
time to time among major New York City banks from the date that payment should
have been made under the Agreement; provided that if the Executive initiated the
proceedings, the Executive shall not have been found by the court or other fact
finder to have acted in bad faith in initiating such litigation or other
proceeding, which finding must be final without further rights of appeal.
(c) The Company's obligation to pay the Executive the
compensation and to make the arrangements provided herein shall be absolute and
unconditional and shall not be affected by any circumstance, including, without
limitation, any setoff, counterclaim, recoupment, defense or other right which
the Company may have against the Executive or anyone else. All amounts payable
by the Company hereunder shall be paid without notice or demand. Except as
expressly provided herein, the Company waives all rights which it may now have
or may hereafter have conferred upon it, by statute or otherwise, to terminate,
cancel or rescind this Agreement in whole or in part. Except as provided in
paragraph 3(f) herein, each and every payment made hereunder by the Company
shall be final and the Company will not seek to recover for any reason all or
any part of such payment from the Executive or any person entitled thereto. The
Executive shall not be required to mitigate the amount of any payment or other
benefit provided for in this Agreement by seeking other employment or otherwise.
(d) The Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company (excluding, for
this purpose, the sale of the Company's Government Technology division), by
written agreement in form and substance satisfactory to the Executive, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place.
As used in this Agreement, "Company" shall mean the Company
as hereinbefore defined and any successor to its business and/or assets as
aforesaid which executes and delivers the agreement provided for in this
paragraph 5 or which otherwise becomes bound by all the terms and provisions of
this Agreement by operation of law.
(e) This Agreement shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devises and legatees. If the
Executive should die while any amounts would still be payable to the Executive
hereunder if he had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the Executive's devisee, legatee or other designee or, if there be no such
designee, to the Executive's estate. The obligations of the Executive hereunder
shall not be assignable by the Executive.
(f) Nothing in this Agreement shall be deemed to entitle
the Executive to continued employment with the Company or a Subsidiary, and the
rights of the Company or a Subsidiary to terminate the employment of the
Executive shall continue as fully as though this Agreement were not in effect.
6. NOTICE.
For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
C. Richard Bagshaw
6134 Bramble Court
Lawrenceville, NJ 08648
If to the Company:
Base Ten Systems, Inc.
One Electronics Drive
P. O. Box 3151
Trenton, New Jersey 08619
Attention: Secretary
7. MISCELLANEOUS.
No provisions of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in
writing, signed by the Executive and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No assurances or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement or the
Employment Agreement. However, this Agreement is in addition to, and not in lieu
of, any other plan providing for payments to or benefits for the Executive or
any agreement now existing, or which hereafter may be entered into, between the
Company and the Executive. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of New
Jersey.
8. FINANCING.
All amounts due and benefits provided under this Agreement
shall constitute general obligations of the Company in accordance with the terms
of this Agreement. The Executive shall have only an unsecured right to payment
thereof out of the general assets of the Company. Notwithstanding the foregoing,
the Company may, by agreement with one or more trustees to be selected by the
Company, create a trust on such terms as the Company shall determine to make
payments to the Executive in accordance with the terms of this Agreement.
<PAGE>
9. VALIDITY.
The invalidity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect. Any
provision in this Agreement which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective only to the extent
of such prohibition or unenforceability without invalidating or affecting the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date set forth above.
BASE TEN SYSTEMS, INC.
T.E. GARDNER
By:----------------------------------
Chairman of the Board and
Chief Executive Officer
C. RICHARD BRAGSHAW
-----------------------------------
(EXECUTIVE)
December 8, 1997
Mr. William F. Hackett
34 Wilshire Drive
Belle mead, NJ 08502
Dear Bill:
It is a pleasure to extend to you an offer to join Base Ten Systems, Inc. as
Senior Vice President, Finance and Administration effective December 10, 1997.
As you know, Base Ten is in the process of completing a strategic shift from
weapons control systems for the defense industry to manufacturing execution
systems (MES) software for regulated industries, especially pharmaceutical
manufacturers. Your recent experience with Bloomberg Financial Markets and your
many years of financial, marketing, planning and general management experience
lead us to believe that you will be quite successful in your new role and
responsibilities.
Your initial compensation will be as follows:
1. Base Salary - Your base salary will be at the annual rate of $160,000 earned
and paid bi-weekly, in accordance with Base Ten's normal pay policy. You
will be eligible for a salary review in July 1998 and for an annual salary
review thereafter. Salary action will be based on merit and performance.
2. Bonus - You will be eligible for a bonus equaling up to 40% of your base
salary. The amount of your bonus will be determined by management based on
your meeting agreed upon performance targets and on the overall performance
of the Company. This bonus will be paid within 120 days after the end of
each fiscal year.
3. Stock Option - We will make best efforts to secure the needed approvals of
the shareholders and of the Board of Directors to authorize additional
shares of Base Ten Class A Common Stock for option purposes and to grant you
an option to purchase 50,000 shares from this proposed authorization. Your
purchase price per share under this option grant would be at the NASDAQ
closing price on the day that your option is granted. Assuming it is
granted, this option will vest 20,000 shares immediately and 10,000 shares
on each of the first three anniversaries from the date of the grant. You
will be eligible from time to time for future grants at the discretion of
the Board of Directors.
4. Severance Protection - In accordance with Base Ten policy you can be
separated from the Company at any time for either cause or convenience.
Should your employment be terminated by the Company for convenience you will
receive salary continuation, including benefits, for a period of six months.
Should your employment be terminated by the Company for cause there will be
no severance pay.
5. Benefits - You will be entitled to the standard package of Base Ten benefits
offered to U. S. exempt employees including eight paid holidays and three
weeks vacation.
This offer is contingent upon the fact that there is nothing outstanding,
including any restrictive nondisclosure/noncompetition agreements with or any
obligations to any parties which would prohibit your ability to function in full
as Senior Vice President, Finance and Administration and, upon board approval,
as an officer of the Company.
The terms of this letter of offer are governed by the laws of the State of New
Jersey and shall be subject to periodic review. Employment with the Company is
as defined and governed by Company policies and procedures.
Please confirm your acceptance to this offer by signing both this and the
enclosed Agreement with Respect to Inventions, Disclosures and Competition.
Originals should be returned to the attention of Jo Ann Fechter, Personnel
Manager. You may retain the copies for your files.
At Base Ten, Bill, we are exceptionally excited about our growth prospects. We
hope that you choose to accept our offer and look forward to your joining us
early in December.
Sincerely,
RICHARD J. FARRELLY
- - ----------------------------
Richard J. Farrelly
Sr. Vice President, Planning and Human Resources
cc: T. E. Gardner
Board of Directors
ACCEPTED:
WILLIAM F. HACKETT
- - ---------------------------
William F. Hackett
December 10, 1997
CHANGE IN CONTROL AGREEMENT
THIS AMENDED AND RESTATED AGREEMENT dated May 26, 1998, by
and between Base Ten Systems, Inc., a New Jersey corporation (together with any
successor, the "Company"), and William F. Hackett, residing at 34 Wilshire Dr.,
Belle Mead, NJ 08502, (the "Executive").
W I T N E S S E T H:
WHEREAS, should the Company receive a proposal from or
engage in discussions with a third person concerning a possible business
combination with or the acquisition of a substantial portion of voting
securities of the Company, the Board of Directors of the Company (the "Board")
has deemed it imperative that it and the Company be able to rely on the
Executive to continue to serve in his position and that the Board and the
Company be able to rely upon his advice as being in the best interests of the
Company and its shareholders without concern that the Executive might be
distracted by the personal uncertainties and risks that such a proposal or
discussions might otherwise create; and
WHEREAS, the Company desires to enhance executive morale
and its ability to retain existing management; and
WHEREAS, the Company desires to reward the Executive for
his service to the Company or one or more of its subsidiary corporations (each
together with any successor, a "Subsidiary") should his service be terminated
under circumstances hereinafter described; and
WHEREAS, the Board therefore considers it in the best
interests of the Company and its shareholders for the Company to enter into
Change in Control Agreements, in form similar to this Agreement, with certain
key executive officers of the Company; and
WHEREAS, the Executive is presently a key executive with
whom the Company has been authorized by the Board to enter into this Agreement;
WHEREAS, as of the date of this Agreement, the specialized
knowledge and skills of the Executive will be particularly needed by the Company
as the Company continues to expand its medical technology business, and
stability at the top management level is and will be critically important to the
ultimate success of the Company; and
WHEREAS, in order to provide an incentive to members of top
management not to seek and consider opportunities outside of the Company, which
would substantially impede the continued expansion of the Company's medical
technology business, while at the same time continuing to engage in its historic
business, the Company's independent directors have determined it to be in the
best interests of the Company to revise and amend this Agreement in order to
make it consistent with the purposes underlying the original entry of this
Agreement;
NOW, THEREFORE, to assure the Company of the Executive's
continued dedication and the availability of his advice and counsel in the event
of any such proposal, to induce the Executive to remain in the employ of the
Company or a Subsidiary, and to reward the Executive for his valuable, dedicated
service to the Company or a Subsidiary should his service be terminated under
circumstances hereinafter described, and for other good and valuable
consideration, the receipt and adequacy whereof each party acknowledges, the
Company and the Executive agree as follows:
1. OPERATION, EFFECTIVE DATE, AND TERM OF AGREEMENT.
(a) This Agreement shall commence on the date hereof and
continue in effect through December 31, 2000; provided, however, that commencing
on January 1, 1999 and each succeeding January 1 thereafter, the term of this
Agreement shall be extended automatically for one additional year (so that at
all times the remaining term hereof shall not be less than two (2) years) unless
not later than the September 30 preceding such automatic extension date the
Company shall have given notice that it does not wish to extend this Agreement.
(b) This Agreement is effective and binding on both parties
as of the date hereof. Notwithstanding its present effectiveness, the provisions
of paragraphs 3 and 4 of this Agreement shall become operative only when, as and
if there has been a "Change in Control of the Company." For purposes of this
Agreement, a "Change in Control of the Company" shall be deemed to have occurred
if
(X) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")), or persons "acting
in concert" (which for purposes of this Agreement shall
include two or more persons voting together on a consistent
basis pursuant to an agreement or understanding between
them), other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company
and other than a person engaging in a transaction of the
type described in clause (Z) of this subsection but which
does not constitute a change in control under such clause,
is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing forty percent (40%)
or more of the combined voting power of the Company's then
outstanding securities; or
(Y) individuals who, as of the date of this
Amended and Restated Agreement, constitute the Board and
any new director ("New Director") whose election by the
Board, or nomination for election by the Company
shareholders, was approved by a vote of at least
seventy-five percent (75%) of the directors then still in
office who either were directors at the beginning of the
period or whose election or nomination for election was
previously so approved ("Continuing Members"), cease for
any reason to constitute a majority thereof (provided that,
for purposes of this clause (Y), the term "New Director"
shall exclude (i) a director designated by a person who has
entered into an agreement with the Company to effect a
transaction described in clauses (X) or (Z) of this
subsection, and (ii) an individual whose initial assumption
of office as a director is in connection with any actual or
threatened contest related to the election of any directors
to the Board); or
(Z) the shareholders of the Company approve or,
if no shareholder approval is required or obtained, the
Company or a Subsidiary completes a merger, consolidation
or similar transaction of the Company or a Subsidiary with
or into any other corporation, or a binding share exchange
involving the Company's securities, other than any such
transaction which would result in the voting securities of
the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or
by being converted into voting securities of the surviving
entity) at least seventy-five percent (75%) of the combined
voting power of the voting securities of the Company or
such surviving entity outstanding immediately after such
transaction, or the shareholders of the Company approve a
plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all or
substantially all the Company's assets (excluding, for this
purpose, the sale of the Company's Government Technology
division).
2. EMPLOYMENT OF EXECUTIVE.
Nothing herein shall affect any right which the Executive
or the Company or a Subsidiary may otherwise have to terminate the Executive's
employment by the Company or a Subsidiary at any time in any lawful manner,
subject always to the Company's providing to the Executive the payments and
benefits specified in paragraphs 3 and 4 of this Agreement to the extent
hereinbelow provided.
In the event any person commences a tender or exchange
offer, circulates a proxy statement to the Company's shareholders or takes other
steps designed to effect a Change in Control of the Company as defined in
paragraph 1 of this Agreement, the Executive agrees that, subject to the
provisions of Section 5(a)(iii), (c) and (j) of the Employment Agreement, he
will not voluntarily leave the employ of the Company or a Subsidiary, and will
continue to perform his regular duties and to render the services specified in
the recitals of this Agreement, until such person has abandoned or terminated
his efforts to effect a Change in Control of the Company or until a Change in
Control of the Company has occurred. Should the Executive voluntarily terminate
his employment before any such effort to effect a Change in Control of the
Company has commenced, or after any such effort has been abandoned or terminated
without effecting a Change in Control of the Company and no such effort is then
in process, this Agreement shall lapse and be of no further force or effect.
3. TERMINATION FOLLOWING CHANGE IN CONTROL.
(a) If any of the events described in paragraph 1 hereof
constituting a Change in Control of the Company shall have occurred, the
Executive shall be entitled to the benefits provided in paragraph 4 hereof upon
the termination of his employment within the applicable period set forth in
paragraph 4 hereof unless such termination is (i) due to the Executive's death;
or (ii) by the Company or a Subsidiary by reason of the Executive's Disability
or for Cause; or (iii) by the Executive other than for Good Reason.
(b) If following a Change in Control of the Company the
Executive's employment is terminated by reason of his death or Disability, the
Executive shall be entitled to death or long-term disability benefits, as the
case may be, from the Company no less favorable than the maximum benefits to
which he would have been entitled had the death or termination for Disability
occurred during the six month period prior to the Change in Control of the
Company. If prior to any such termination for Disability, the Executive fails to
perform his duties as a result of incapacity due to physical or mental illness,
he shall continue to receive his Salary less any benefits as may be available to
him under the Company's or Subsidiary's disability plans until his employment is
terminated for Disability.
(c) If the Executive's employment shall be terminated by
the Company or a Subsidiary for Cause or by the Executive other than for Good
Reason, the Company shall pay to the Executive his full Salary through the Date
of Termination at the rate in effect at the time Notice of Termination is given,
and the Company shall have no further obligations to the Executive under this
Agreement.
(d) For purposes of this Agreement:
(i) "Disability" shall mean the Executive's incapacity due
to physical or mental illness such that the Executive shall
have become qualified to receive benefits under the
Company's or Subsidiary's long-term disability plans or any
equivalent coverage required to be provided to the
Executive pursuant to any other plan or agreement,
whichever is applicable.
(ii) "Cause" shall mean:
(A) the conviction of the Executive for a felony,
or the willful commission by the Executive of a
criminal or other act that in the judgment of the
Board causes or will probably cause substantial
economic damage to the Company or a Subsidiary or
substantial injury to the business reputation of
the Company or a Subsidiary;
(B) the commission by the Executive of an act of
fraud in the performance of such Executive's
duties on behalf of the Company or a Subsidiary
that causes or will probably cause economic
damage to the Company or a Subsidiary; or
(C) the continuing willful failure of the
Executive to perform the duties of such Executive
to the Company or a Subsidiary (other than any
such failure resulting from the Executive's
incapacity due to physical or mental illness)
after written notice thereof (specifying the
particulars thereof in reasonable detail) and a
reasonable opportunity to be heard and cure such
failure are given to the Executive by the
Compensation Committee of the Board with the
approval thereof by a majority of the Continuing
Directors.
For purposes of this subparagraph (d)(ii), no act, or
failure to act, on the Executive's part shall be considered "willful" unless
done, or omitted to be done, by him not in good faith and without reasonable
belief that his action or omission was in the best interests of the Company or a
Subsidiary.
(iii) "Good Reason" shall mean:
(A) The assignment by the Company or a Subsidiary
to the Executive of duties without the
Executive's express written consent, which (i)
are materially different or require travel
significantly more time consuming or extensive
than the Executive's duties or business travel
obligations measured from the point in time one
(1) year prior to the Change in Control of the
Company, or (ii) result in either a significant
reduction in the Executive's authority and
responsibility as a senior corporate executive of
the Company or a Subsidiary when compared to the
highest level of authority and responsibility
assigned to the Executive at any time during the
one (1) year period prior to the Change in
Control of the Company, or, (iii) without the
Executive's express written consent, the removal
of the Executive from, or any failure to
reappoint or reelect the Executive to, the
highest title held since the date one (1) year
before the Change in Control of the Company,
except in connection with a termination of the
Executive's employment by the Company or a
Subsidiary for Cause, or by reason of the
Executive' death or Disability;
(B) A reduction by the Company or a Subsidiary of
the Executive's Salary, or the failure to grant
increases in the Executive's Salary on a basis at
least substantially comparable to those granted
to other executives of the Company or a
Subsidiary of comparable title, salary and
performance ratings made in good faith;
(C) The relocation of the Company's principal
executive offices (or in the case of an employee
of a Subsidiary, the principal executive offices
of such Subsidiary) to a location outside the
State of New Jersey, or the Company's requiring
the Executive to be based anywhere other than the
Company's principal executive offices (or in the
case of an employee of a Subsidiary, the
principal executive officer of such Subsidiary)
except for required travel on the Company's or a
Subsidiary's business to an extent substantially
consistent with the Executive's business travel
obligations measured from the point in time one
(1) year prior to the Change in Control of the
Company, or in the event of any relocation of the
Executive with the Executive's express written
consent, the failure by the Company or a
Subsidiary to pay (or reimburse the Executive
for) all reasonable moving expenses by the
Executive relating to a change of principal
residence in connection with such relocation and
to indemnify the Executive against any loss
realized in the sale of the Executive's principal
residence in connection with any such change of
residence, all to the effect that the Executive
shall incur no loss upon such sale on an after
tax basis;
(D) The failure by the Company or a Subsidiary to
continue to provide the Executive with
substantially the same welfare benefits (which
for purposes of this Agreement shall mean
benefits under all welfare plans as that term is
defined in Section 3(1) of the Employee
Retirement Income Security Act of 1974, as
amended), and perquisites, including
participation on a comparable basis in the
Company's or a Subsidiary's stock option plan,
incentive bonus plan and any other plan in which
executives of the Company or a subsidiary of
comparable title and salary participate and as
were provided to the Executive measured from the
point in time one (1) year prior to such Change
in Control of the Company, or with a package of
welfare benefits and perquisites that is
substantially comparable in all material respects
to such welfare benefits and perquisites; or
(E) The failure of the Company to obtain the
express written assumption of and agreement to
perform this Agreement by any successor as
contemplated in subparagraph 5(d) hereof.
(iv) "Dispute" shall mean (i) in the case of termination of
employment of the Executive with the Company or a
Subsidiary by the Company or a Subsidiary for Disability or
Cause, that the Executive challenges the existence of
Disability or Cause and (ii) in the case of termination of
employment of the Executive with the Company or a
Subsidiary by the Executive for Good Reason, that the
Company or the Subsidiary challenges the existence of Good
Reason.
(v) "Salary" shall mean the Executive's average annual
compensation reported on Form W-2.
(vi) "Incentive Compensation" in any year shall mean the
amount the Executive has elected to defer in such year
pursuant to any plan, arrangement or contract providing for
the deferral of compensation.
(e) Any purported termination of employment by the Company
or a Subsidiary by reason of the Executive's Disability or for Cause, or by the
Executive for Good Reason, shall be communicated by written Notice of
Termination to the other party hereto. For purposes of this Agreement, a "Notice
of Termination" shall mean a notice given by the Executive or the Company or a
Subsidiary, as the case may be, which shall indicate the specific basis for
termination and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for determination of any payments under this
Agreement. The Executive shall not be entitled to give a Notice of Termination
that the Executive is terminating his employment with the Company or a
Subsidiary for Good Reason more than six (6) months following the later to occur
of (i) the Change in Control and (ii) the occurrence of the event alleged to
constitute Good Reason. The Executive's actual employment by the Company or a
Subsidiary shall cease on the Date of Termination specified in the Notice of
Termination, even though such Date of Termination for all other purposes of this
Agreement may be extended in the manner contemplated in the second sentence of
Paragraph 3(f).
(f) For purposes of this Agreement, "Date of Termination"
shall mean the date specified in the Notice of Termination, which shall be not
more than ninety (90) days after such Notice of Termination is given, as such
date may be modified pursuant to the next sentence. If within thirty (30) days
after any Notice of Termination is given, the party who receives such Notice of
Termination notifies the other party that a Dispute (as heretofore defined)
exists, the Date of Termination shall be the date on which the Dispute is
finally determined, either by mutual written agreement of the parties, or by a
final judgment, order or decree of a court of competent jurisdiction (the time
for appeal therefrom having expired and no appeal having been perfected);
provided that the Date of Termination shall be extended by a notice of Dispute
only if such notice is given in good faith and the party giving such notice
pursues the resolution of such Dispute with reasonable diligence and provided
further that pending the resolution of any such Dispute, the Company or a
Subsidiary shall continue to pay the Executive the same Salary and to provide
the Executive with the same or substantially comparable welfare benefits and
perquisites that the Executive was paid and provided as of a date one (1) year
prior to the Change in Control of the Company. Should a Dispute ultimately be
determined in favor of the Company or a Subsidiary, then all sums paid by the
Company or a Subsidiary to the Executive from the date of termination specified
in the Notice of Termination until final resolution of the Dispute pursuant to
this paragraph shall be repaid promptly by the Executive to the Company or a
Subsidiary, with interest at the prime rate generally prevailing from time to
time among major New York City banks and all options, rights and stock awards
granted to the Executive during such period shall be cancelled or returned to
the Company or Subsidiary. The Executive shall not be obligated to pay to the
Company or a Subsidiary the cost of providing the Executive with welfare
benefits and perquisites for such period unless the final judgment, order or
decree of a court or other body resolving the Dispute determines that the
Executive acted in bad faith in giving a notice of Dispute. Should a Dispute
ultimately be determined in favor of the Executive or be settled by mutual
agreement between the Executive and the Company, then the Executive shall be
entitled to retain all sums paid to the Executive under this subparagraph (f)
for the period pending resolution of the Dispute and shall be entitled to
receive, in addition, the payments and other benefits to the extent provided for
in paragraph 4 hereof to the extent not previously paid hereunder.
<PAGE>
4. PAYMENTS UPON TERMINATION.
If within three years after a Change in Control of the
Company (or if within nine (9) months prior to a Change in Control if effected
in connection with such Change in Control), the Company or a Subsidiary shall
terminate the Executive's employment other than by reason of the Executive's
death, Disability or for Cause or the Executive shall terminate his employment
for Good Reason then,
(a) The Company or a Subsidiary will pay on the Date of
Termination to the Executive as compensation for services
rendered on or before the Executive's Date of Termination,
a lump sum cash amount (subject to any applicable payroll
or taxes required to be withheld computed at the rate for
supplemental payments) equal to (i) 2.99 times the sum of
the average for each of the five fiscal years of the
Company ending before the day on which the Change in
Control of the Company occurs of the Executive's Salary,
his Incentive Compensation and the annual cost to the
Company of all hospital, medical and dental insurance, life
insurance, disability insurance and other welfare or
benefit plan provided to the Executive minus (ii) the cost
to the Company of the insurance required under subparagraph
4(b) hereof;
(b) For a period of three years following the Date of
Termination, the Company shall provide, at Company expense,
the Executive and the Executive's spouse with full
hospital, medical and dental insurance with substantially
the same coverage and benefits as were provided to the
Executive immediately prior to the Change in Control of the
Company; and
(c) In event that any payment or benefit received or to be
received by the Executive pursuant to this Agreement in
connection with a Change in Control of the Company or the
termination of the Executive's employment (collectively
with all payments and benefits hereunder, "Total Payments")
would not be deductible in whole or in part by the Company
as the result of Section 280G of the Internal Revenue Code
of 1986, as amended and the regulations thereunder (the
"Code"), the payments and benefits hereunder shall be
reduced until no portion of the Total Payments is not
deductible by reducing to the extent necessary the payment
under subparagraph (a) hereof. For purposes of this
limitation (i) no portion of the Total Payments the receipt
or enjoyment of which the Executive shall have effectively
waived in writing prior to the date of payment shall be
taken into account, (ii) no portion of the Total Payments
shall be taken into account which in the opinion of tax
counsel selected by the Executive and acceptable to the
Company's independent auditors the Executive is not likely
to constitute a "parachute payment" within the meaning of
Section 280G(b)(2) of the Code, and (iii) the value of any
non-cash benefit or any deferred payment or benefit
included in the Total Payments shall be determined by the
Company's independent auditors in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code.
5. GENERAL.
(a) The Executive shall retain in confidence any
proprietary or other confidential information known to him concerning the
Company and its business (including the Company's Subsidiaries and their
businesses) so long as such information is not publicly disclosed and disclosure
is not required by an order of any governmental body or court.
(b) If litigation or other proceedings shall be brought to
enforce or interpret any provision contained herein, or in connection with any
tax audit to the extent attributable to the application of Section 4999 of the
Code to any payment or benefit provided hereunder, the Company shall indemnify
the Executive for his reasonable attorney's fees and disbursements incurred in
connection therewith (which indemnification shall be made at regular intervals
during the course of such litigation, not less frequently than every three (3)
months) and pay prejudgment interest on any money judgment obtained by the
Executive calculated at the prime rate of interest generally prevailing from
time to time among major New York City banks from the date that payment should
have been made under the Agreement; provided that if the Executive initiated the
proceedings, the Executive shall not have been found by the court or other fact
finder to have acted in bad faith in initiating such litigation or other
proceeding, which finding must be final without further rights of appeal.
(c) The Company's obligation to pay the Executive the
compensation and to make the arrangements provided herein shall be absolute and
unconditional and shall not be affected by any circumstance, including, without
limitation, any setoff, counterclaim, recoupment, defense or other right which
the Company may have against the Executive or anyone else. All amounts payable
by the Company hereunder shall be paid without notice or demand. Except as
expressly provided herein, the Company waives all rights which it may now have
or may hereafter have conferred upon it, by statute or otherwise, to terminate,
cancel or rescind this Agreement in whole or in part. Except as provided in
paragraph 3(f) herein, each and every payment made hereunder by the Company
shall be final and the Company will not seek to recover for any reason all or
any part of such payment from the Executive or any person entitled thereto. The
Executive shall not be required to mitigate the amount of any payment or other
benefit provided for in this Agreement by seeking other employment or otherwise.
(d) The Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company (excluding, for
this purpose, the sale of the Company's Government Technology division), by
written agreement in form and substance satisfactory to the Executive, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place.
As used in this Agreement, "Company" shall mean the Company
as hereinbefore defined and any successor to its business and/or assets as
aforesaid which executes and delivers the agreement provided for in this
paragraph 5 or which otherwise becomes bound by all the terms and provisions of
this Agreement by operation of law.
(e) This Agreement shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devises and legatees. If the
Executive should die while any amounts would still be payable to the Executive
hereunder if he had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the Executive's devisee, legatee or other designee or, if there be no such
designee, to the Executive's estate. The obligations of the Executive hereunder
shall not be assignable by the Executive.
(f) Nothing in this Agreement shall be deemed to entitle
the Executive to continued employment with the Company or a Subsidiary, and the
rights of the Company or a Subsidiary to terminate the employment of the
Executive shall continue as fully as though this Agreement were not in effect.
6. NOTICE.
For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
William F. Hackett
34 Wilshire Dr.
Belle Mead, NJ 08502
If to the Company:
Base Ten Systems, Inc.
One Electronics Drive
P. O. Box 3151
Trenton, New Jersey 08619
Attention: Secretary
7. MISCELLANEOUS.
No provisions of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in
writing, signed by the Executive and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No assurances or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement or the
Employment Agreement. However, this Agreement is in addition to, and not in lieu
of, any other plan providing for payments to or benefits for the Executive or
any agreement now existing, or which hereafter may be entered into, between the
Company and the Executive. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of New
Jersey.
8. FINANCING.
All amounts due and benefits provided under this Agreement
shall constitute general obligations of the Company in accordance with the terms
of this Agreement. The Executive shall have only an unsecured right to payment
thereof out of the general assets of the Company. Notwithstanding the foregoing,
the Company may, by agreement with one or more trustees to be selected by the
Company, create a trust on such terms as the Company shall determine to make
payments to the Executive in accordance with the terms of this Agreement.
<PAGE>
9. VALIDITY.
The invalidity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect. Any
provision in this Agreement which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective only to the extent
of such prohibition or unenforceability without invalidating or affecting the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date set forth above.
BASE TEN SYSTEMS, INC.
T.E. GARDNER
By:----------------------------------------
Chairman of the Board and
Chief Executive Officer
WILLIAM F. HACKETT
----------------------------------------
(EXECUTIVE)
EXHIBIT 21
Base Ten Systems, Inc.
Subsidiaries of Registrant
The following are wholly-owned subsidiaries of the Registrant:
State or Jurisdiction
Name of Organization
----- ---------------
Base Ten Software, Inc. New Jersey (a)
Base Ten FlowStream, Inc. New Jersey (a)
Base Ten Systems, Ltd. United Kingdom (a)
Base Ten Software, Ltd. Ireland (a)
BTS Software GmbH Germany (a)
Base Ten Systems NV Belgium (a)
Base Ten Aerospace and Communications, Inc. New Jersey (b)
Base Ten of Canada, Ltd. Canada (b)
Base Ten Investment, Co. Delaware (b)
Base Ten International Sales, Ltd. Jamaica (b)
(a) Financial statements included in Consolidated Financial Statements of
Registrant
(b) Dormant
EXHIBIT 23.1
Consent of Independent Accountants'
The Board of Directors and Shareholders
Base Ten Systems, Inc.
Trenton, New Jersey 08619
We consent to the incorporation by reference in the Registration
Statements No. 33-89712, No. 33-60454, No. 33-55752, No. 333-00721; No.
333-21925; No. 333-59881, No. 333-59883, No. 333-59885 and Amendment No. 1 to
Registration Statement No. 2-84451 of Base Ten Systems, Inc. and Subsidiaries on
Form S-8 and the Registration Statement No. 33-89710, No. 333-00719, No.
333-06317, No. 333-21923, No. 333-31335, No. 333-34159, No. 333-46095 and No.
333-70535 of Base Ten Systems, Inc. and Subsidiaries on Form S-3 of our report
dated April 12, 1999 appearing in this annual report on Form 10-K of Base Ten
Systems, Inc. and Subsidiaries for the year ended December 31, 1998.
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
April 15, 1999
EXHIBIT 23.2
Independent Auditors' Consent
The Board of Directors and Shareholders
Base Ten Systems, Inc.
Trenton, New Jersey 08619
We consent to the incorporation by reference in the Registration
Statements No. 33-89712, No. 33-60454, No. 33-55752, No. 333-00721; No.
333-21925; No. 333-59881, No. 333-59883, No. 333-59885 and Amendment No. 1 to
Registration Statement No. 2-84451 of Base Ten Systems, Inc. and Subsidiaries on
Form S-8 and the Registration Statement No. 33-89710, No. 333-00719, No.
333-06317, No. 333-21923, No. 333-31335, No. 333-34159, No. 333-46095 and No.
333-70535 of Base Ten Systems, Inc. and Subsidiaries on Form S-3 of our report
dated February 6, 1998, appearing in this annual report on Form 10-K of Base Ten
Systems, Inc. and Subsidiaries for the year ended October 31, 1997.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
April 15, 1999
EXHIBIT 24
Power of Attorney
KNOWN ALL MEN BY THESE PRESENTS that each individual whose signature appears
below constitutes and appoints Thomas E. Gardner and William F. Hackett, and
each of them, his true and lawful attorneys-in-fact and agents with full power
of substitution, for him and in his name, place and stead in any and all
capacities, to sign the Annual Report on Form 10-K of Base Ten Systems, Inc. for
the fiscal year ended December 31, 1998 and any amendments thereto, and to file
same, with all exhibits thereto, and all documents in connection therewith, with
the Securities and Exchange Commission, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done to
comply with the provisions of the Securities Act of 1934, and all requirements
of the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them, or their or his
substitutes, may lawfully do or cause to be done by virtue thereof.
THOMAS E. GARDNER
------------------------------
Thomas E. Gardner
WILLIAM F. HACKETT
------------------------------
William F. Hackett
ALEXANDER M. ADELSON
------------------------------
Alexander M. Adelson
------------------------------
David C. Batten
ALAN S. POOLE
------------------------------
Alan S. Poole
CARL W. SCHAFER
------------------------------
Carl W. Schafer
WILLIAM SWORD
------------------------------
William Sword
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