-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BIJ00yM8F+pMeiW7K1rgBu6ljOudbDlnkitvmcoKx5JiPqBQCDIJsN2UN8J3PGD0 NeRK3MZ1Mgd8nEyIZ2XEhw== 0000914121-98-000010.txt : 19980112 0000914121-98-000010.hdr.sgml : 19980112 ACCESSION NUMBER: 0000914121-98-000010 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980109 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BASE TEN SYSTEMS INC CENTRAL INDEX KEY: 0000010242 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 221804206 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-07100 FILM NUMBER: 98503929 BUSINESS ADDRESS: STREET 1: ONE ELECTRONICS DR CITY: TRENTON STATE: NJ ZIP: 08619 BUSINESS PHONE: 6095867010 MAIL ADDRESS: STREET 1: ONE ELECTRONICS DR CITY: TRENTON STATE: NJ ZIP: 08619 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported) December 31, 1997 Base Ten Systems, Inc. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) New Jersey 0-7100 22-1804206 - -------------------------------------------------------------------------------- (State or Other (Commission (I.R.S. Employer Jurisdiction of File Number) Identification No.) Incorporation) One Electronics Drive, Trenton, New Jersey 08619 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (609) 586-7010 - -------------------------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) - -------------------------------------------------------------------------------- (Former Name or Former Address, If Changed Since Last Report.) Item 2. Acquisition or Disposition of Assets On December 31, 1997, following approval by the shareholders of Base Ten Systems, Inc. (the "Company", the "Registrant" or "Base Ten") at a special meeting held on that date, the Company sold all of the assets, subject to certain liabilities, of the Company's Government Technology Division ("GTD") to Strategic Technology Systems, Inc. ("Strategic"), a newly formed corporation that is owned in part and will be managed by certain persons who had been members of the Company's senior management (the "Sale"). Those persons had been historically, and at the time of the sale were, significantly involved in GTD's business and development. The terms of the Sale and certain financial and other information related thereto is set forth in Registrant's Current Report on Form 8-K dated October 27, 1997, which, together with the Exhibits filed therewith, is hereby incorporated in its entirety herein; and in Registrant's Proxy Statement, dated December 15, 1997, for the special meeting of shareholders held on December 31, 1997, the following portions of which are hereby incorporated by reference herein -- all matters under the caption "The Proposed Sale of the Governmental Technology Division" (page 5 et seq.); all matters under the caption "Information Concerning Base Ten Systems, Inc." (page 32 et seq.); and "Index to Financial Statements" (page F-1 et seq.). Item 5. Other Events a) In order to assure that what the Company believes will be adequate financial resources are available for its continued marketing and development efforts, the Company consummated on December 31, 1997, the second (and final) installment of the sale of an aggregate of $19 million of convertible preferred stock ("Preferred Stock") and Class A Stock purchase warrants (the "Warrants"), of which $9.375 million of Preferred Stock and Warrants were sold and issued as of December 5, 1997, and $9.675 million of Preferred Stock and Warrants were sold and issued as of December 31, 1997, in each case to several institutional investors. In order to complete the closing of the financing referred to above, certain actions were required to be taken by the shareholders of the Company; those actions were taken at the special meeting of shareholder of the Company held on December 31, 1997. The terms of the financing referred to above, including the terms of the Preferred Stock and the Warrants, are described in detail in Registrant's Current Report in Form 8-K dated December 9, 1997, which, together with the Exhibits thereto (other than Exhibit 99.5 - Press Release, dated as of December 9, 1997), is hereby incorporated by reference herein. The matter related to the financing that was proposed for approval by the Company's shareholders at the special meeting held on December 31, 1997, is described in detail in the Proxy Statement, dated December 15, 1997, related thereto. The information in such Proxy Statement under the caption "The Proposed Issuance" (page 48 et seq.) is hereby incorporated by reference herein. b) At the Company's special meeting of shareholders held on December 31, 1997, three matters were presented for approval by the shareholders: (i) the Sale of the GTD; (ii) the issuance of the Preferred Stock and the Warrants; and (iii) amendments to the Company's various stock option plans that were deemed necessary to retain valued employees of both the GTD and the Company during the Sale process and to encourage certain employees to agree to be employed by a buyer of the GTD. All three proposals were approved by the shareholders at the special meeting held on December 31, 1997. Certain information concerning the third proposal is contained in the Company's Proxy Statement, dated December 15, 1997, that was disseminated in connection with the December 31, 1997, special meeting. In that respect, the information set forth under the caption "The Proposed Option Plan Amendments" (page 51, et seq.) in the aforementioned Proxy Statement is hereby incorporated by reference herein. Item 7. Financial Statements and Exhibits a) The financial statements of the GTD, which was sold as described in response to Item 2 of this Current Report on Form 8-K, as well as certain pro forma financial information, are contained in the Company's Proxy Statement, dated December 15, 1997, that was disseminated in connection with the special meeting of shareholders held on December 31, 1997. In that respect, the following is hereby incorporated by reference herein from the said Proxy Statement: the information appearing under the caption "The Proposed Sale of the Government Technology Division - Unaudited Pro Forma Financial Statements of the Company" (page 27 et seq.); "Information Concerning Base Ten Systems, Inc. - Selected Financial Data" (;page 32 et seq.); "Information Concerning Base Ten Systems, Inc. - Management's Discussion and Analysis of Financial Condition and Results of Operations" (page 34 et seq.); and "Index to Financial Statements" (page F-1 et seq.). b) Exhibits: 99.1 Registrant's Current Report on Form 8-K dated October 27, 1997 (SEC File No. 0-7100). 99.2 Registrant's Current Report on Form 8-K dated December 9, 1997 (SEC File No. 0-7100). 99.3 Registrant's Proxy Statement, dated December 15, 1997, related to the special meeting of shareholders held on December 31, 1997. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. BASE TEN SYSTEMS, INC. Date: January 9, 1998 By: /s/ Thomas E. Gardner --------------------- Name: Thomas E. Gardner Title: President and Chief Executive Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. BASE TEN SYSTEMS, INC. Date: January 9, 1998 By: /s/ William F. Hackett ---------------------- Name: William F. Hackett Title: Chief Financial Officer EX-99.1 2 EXHIBIT FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported) October 27, 1997 Base Ten Systems, Inc. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) New Jersey 0-7100 22-1804206 - -------------------------------------------------------------------------------- (State or Other (Commission (I.R.S. Employer Jurisdiction of File Number) Identification No.) Incorporation) One Electronics Drive, Trenton, New Jersey 08619 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (609) 586-7010 - -------------------------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) - -------------------------------------------------------------------------------- (Former Name or Former Address, If Changed Since Last Report) ITEM 2. Acquisition or Disposition of Assets On October 27, 1997, Base Ten Systems, Inc. (the "Company") entered into an Asset Purchase Agreement (the "Agreement") with Strategic Technologies, Inc., a Nevada corporation ("Purchaser"), pursuant to which the Company will sell substantially all of the assets, subject to certain liabilities, of the Government Technology Division ("GTD") to the Purchaser (the "Sale"). The Purchaser will be operated and partially owned by certain members of the Company's senior management (the "Management Group") who have been over time, and are currently, significantly involved in the business and development of the GTD. The Management Group is led by Mr. Edward Klinsport, Executive Vice President and Secretary of the Company, and consists primarily of senior operating personnel of the GTD, certain of whom will own equity interests in, and all of whom will be employed by, the Purchaser, Pursuant to the terms of the Asset Purchase Agreement executed by the Company and the Purchaser in connection with the proposed Sale, in consideration of the transfer to the Purchaser of substantially all of the operating assets of the GTD (the "Assets") and assumption by the Purchaser of certain liabilities associated with the GTD (the "Assumed Liabilities"), the Company will receive cash in the amount of $3,500,000 and a promissory note (the "Note") to be issued by the Purchaser in favor of the Company, in a principal amount equal to the difference between (x) the amount of the net assets of the GTD (as such amount shall be determined jointly between the Purchaser and the Company on the basis of the Company's books of account) plus $400,000, and (y) $3,500,000. The Note will have a term of five years and bear interest at the rate of 7.5% per annum. Principal payments under the Note will amortize over a three year period beginning on the second anniversary of the closing of the Sale. Interest on the Note will be payable quarterly beginning at the end of the first fiscal quarter following the closing of the Sale. Net assets of the GTD will be the amount equal to the difference between the monetary value of the Assets reduced by the monetary value of the Assumed Liabilities. The Note will be unsecured. Payment of the outstanding principal and accrued interest under the Note will be accelerated upon the occurrence of certain events including (a) any repayment of the principal of any indebtedness of the Purchaser to affiliates of the Purchaser, and (b) certain customary events of default. The Company will also receive a warrant (the "Warrant") exercisable for that number of shares of voting common stock of the Purchaser as equals 5% of the Purchaser's issued and outstanding shares of common stock and common stock equivalents immediately following and giving effect to the Purchaser's initial underwritten public offering, with respect to which there can be no assurance. In addition, if, within twelve months of the closing of the Sale, the Purchaser enters into an agreement with Daimler Benz Aerospace pursuant to which Daimler Benz Aerospace agrees to purchase 600 or more Pylon Decoder Units, then, as additional consideration, the Purchaser will pay the Company $400,000, which amount will be payable in the amount of $100,000 per fiscal quarter beginning three months after the Purchaser receives the initial order under such agreement. The Agreement also provides that the Company will sub-lease to Purchaser for a term of five years an approximately 40,000 square foot portion of the Company's main building located at One Electronics Drive, Trenton, New Jersey (the "Leased Space"). The initial rent the Purchaser will pay the Company for the Leased Space will be at the rate of (i) $7.00 per square foot for office and manufacturing space, and (ii) $3.00 per square foot for shared common areas, or a total of $240,000 annually. In addition, the Purchaser will be responsible for its pro rata share of the building's electric, heating, insurance, tax and maintenance expenses. Completion of the Sale will be subject to certain third-party consents and approval by the Company's shareholders, who will also be asked to approve separately amendments to certain provisions of the Company's incentive stock option plans (the "Amendments"). Such Amendments extend the date on which certain options held by persons who will continue in the employ of the Purchaser may be exercised. The effect of these Amendments will be a non-cash charge of $900,000 maximum against the Company's earnings in the first quarter of 1998. Attached to this Report as Exhibit 99.1 is the form of Asset Purchase Agreement, executed in connection with the proposed Sale. ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits (b) Pro Forma Financial Information Unaudited Pro Forma Condensed Consolidated Balance Sheet as of July 31, 1997..................................F1 Unaudited Pro Forma Condensed Consolidated Statements of Income of the Company...................................F3 (c) Exhibits 2.1 Asset Purchase Agreement 99.1 Press Release, dated as of October 27, 1997 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. BASE TEN SYSTEMS, INC. Date: November __, 1997 By: /s/Edward J. Klinsport ----------------------- Name: Edward J. Klinsport Title: Executive Vice President and Secretary Unaudited Pro Forma Financial Information Unaudited Pro Forma Condensed Consolidated Balance Sheet of the Company The unaudited pro forma condensed consolidated balance sheet has been derived from the historical consolidated balance sheet of the Company. The unaudited pro forma condensed consolidated balance sheet of the Company has been prepared assuming the Sale of the GTD occurred on July 31, 1997. The unaudited pro forma condensed consolidated balance sheet should be read in conjunction with the historical financial statements of the Company and the notes thereto for the three years in the period ended October 31, 1996 and for the nine months ended July 31, 1997 included in the Company's periodic reports filed with the Securities and Exchange Commission. The unaudited pro forms condensed consolidated balance sheet is not necessarily reflective of the financial position of the Company had the Sale of the GTD occurred on July 31, 1997. Base Ten Systems, Inc. Pro Forma Consolidated Balance Sheet As of July 31, 1997
Company Pro-forma Company Historical Sale(1) Adjustments Pro-forma ---------- ------- ----------- --------- ASSETS CURRENT ASSETS: Cash $3,771 $ -- $3,500(2) $7,271 Accounts Receivable 7,181 (4,375) 2,806 Inventories 3,868 (3,111) 757 Current portion of employee loan receivable 128 -- 128 Other current assets 601 -- --- TOTAL CURRENT ASSETS 15,549 (7,486) 3,500 11,563 PROPERTY, PLANT & EQUIPMENT 5,209 (862) 4,347 EMPLOYEE LOAN RECEIVABLE 47 -- 47 NOTES RECEIVABLE -- -- 3,322(2) 3,322 OTHER ASSETS 8,717 8,717 ----- -------- -------- ----- TOTAL ASSETS $29,522 $(8,348) $6,822 $27,996 ======= ======= ====== ======= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable $1,045 (592) $ $ 453 Accrued Expenses 3,693 (1,334) 625(3) 2,984 Current portion of capital lease obligation 54 -- 54 -- -- TOTAL CURRENT LIABILITIES 4,792 (1,926) 625 3,491 ----- ------ --- ----- LONG TERM LIABILITIES: Other long-term liabilities 272 -- 272 Capital lease obligation 3,441 -- 3,441 Long-term debt 15,500 -- 15,500 ------ ------ TOTAL LONG-TERM LIABILITIES 19,213 -- 19,213 ------ ------ SHAREHOLDERS' EQUITY Preferred Stock, $1.00 par value, authorized and unissued - 1,000,000 shares Class A Common Stock, $1.00 par value, 22,000,000 shares authorized; issued and outstanding 7,497,360 in 1997 7,497 -- 7,497 Class B Common Stock, $1.00 par value 2,000,000 shares authorized; issued and outstanding 445,121 in 1997 445 -- -- 445 Additional paid in capital 25,603 -- 900(4) 26,503 Deficit (27,885) (6,422) 5,297(2)(3)(4) (29,010) 5,660 (6,422) 6,197 5,435 Equity adjustment from foreign currency translation (143) -- (143) 5,517 (6,422) 6,197 5,292 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $29,522 $(8,348) $6,822 $27,996
- ---------- Notes to Pro forma Consolidated Balance Sheet of the Company: (1) Assets and liabilities of the Purchaser. Although the Sale transaction has not been finalized, management believes that any remaining pro forma adjustments would not have a material effect on the financial position of the Company, except those described in Notes 2 and 3. (2) Reflects the receipt of cash and a note receivable for the book value of the assets on the closing date in connection with the Sale. (3) Reflects the liability for expenses in connection with the Sale of $625. (4) Reflects the adjustment for the change in measurement date of certain employee stock options of $900. Unaudited Pro Forma Condensed Consolidated Statements of Income of the Company The unaudited pro forma condensed consolidated statements of income have been derived from the historical consolidated statements of income of the Company. The unaudited pro forma condensed consolidated statement of income for the year ended October 31, 1996, and the unaudited pro forma condensed consolidated statement of income for the nine months ended July 31, 1997, has been prepared assuming the Sale occurred on November 1, 1995. The unaudited pro forma condensed consolidated statements of income should be read in conjunction with the historical financial statements of the Company and notes thereto for the three years ended October 31, 1997 and for the nine months ended July 31, 1997 included in the Company's periodic reports filed with the Securities and Exchange Commission. The unaudited pro forma condensed consolidated statements of income are not necessarily indicative of the financial results of the Company had the Sale occurred at the beginning of the period. Base Ten Systems, Inc. Pro Forms Condensed Consolidated Income Statement For the Year Ended October 31, 1996
Company Company Historical Sale(1) Pro-forma ---------- ------- --------- REVENUES Sales $14,591 $13,329 $1,262 Other Income 300 -- 300 --- --- Total Revenues 14,891 13,329 1,562 ------ ------ ----- COST & EXPENSES Cost of Goods Sold 10,973 10,742 231 Research and Development 998 594 404 Selling, General & Administrative 8,509 2,353 6,156 Amortization of Software Development Costs 1,278 -- 1,278 Write-off of software development costs 2,429 -- 2,429 Interest Expense 710 -- 710 --- --- Total Costs and Expenses 24,897 13,689 11,208 LOSS BEFORE INCOME TAXES (10,006) (360) (9,646) ------- ---- ------ INCOME TAX BENEFIT (1,047) -- (1,047) ------ ------ NET LOSS $(8,959) $(360) $(8,599) ======= ===== ======= LOSS PER SHARE ($1.16) ($1.11) ------ ------ WEIGHTED AVERAGE SHARES OUTSTANDING 7,743 -- 7,743 ----- -----
- ---------- Notes to Pro Forma Condensed Consolidated Income Statement: (1) Revenues and expenses of the Purchaser. Although the Sale transaction has not yet been finalized, management believes that any remaining adjustments will not have a material effect on the pro forma results of operations of the Company. Does not include any adjustment for the change in measurement date of certain employee stock options. Base Ten Systems, Inc. Pro Forma Condensed Consolidated Income Statement For the Nine Months Ended July 31, 1997
Company Company Historical Sale(1) Proforma ---------- ------- -------- REVENUES Sales $9,808 $8,219 $1,589 Other Income 133 133 --- --- Total Revenues 9,941 8,219 1,722 ----- ----- ----- COST & EXPENSES Cost of Goods Sold 8,322 6,816 1,506 Research and Development 490 408 82 Selling, General & Administrative 6,114 2,353 3,761 Amortization of Software Development Costs 1,121 1,121 Interest Expense 1,139 1,139 ----- ----- Total Costs and Expenses 17,186 9,577 7,609 LOSS BEFORE INCOME TAXES $(7,245) $(1,358) $(5,887) ======= ======= ======= INCOME TAXES/(BENEFIT) -- -- ------- ------- ------- NET LOSS $(7,245) $(1,358) $(5,887) ------- ------- ------- LOSS PER SHARE $(0.92) $(0.75) ------ ------- ------ WEIGHTED AVERAGE SHARES OUTSTANDING 7,852 7,852 ----- -----
- ---------- Notes to Pro Forma Condensed Consolidated Income Statement: 1. Revenues and expenses of the Purchaser. Although the Sale transaction has not yet been finalized, management believes that any remaining adjustments will not have a material effect on the pro forma results of operations of the Company. Does not include any adjustment for the change in measurement date of certain employee stock options. EX-99.2 3 EXHIBIT FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported) December 9, 1997 Base Ten Systems, Inc. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) New Jersey 0-7100 22-1804206 - -------------------------------------------------------------------------------- (State or Other Jurisdiction (Commission File Number) (I.R.S. Employer of Incorporation) Identification No.) One Electronics Drive, Trenton, New Jersey 08619 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (609) 586-7010 - -------------------------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) - -------------------------------------------------------------------------------- (Former Name or Former Address, If Changed Since Last Report) ITEM 5. Other Events In order to assure that what the Company believes will be adequate financial resources are available for continued marketing and development efforts by the MTD, the Board of Directors authorized, and the Company consummated on December 9, 1997, the first installment of the sale of up to $19 million of convertible preferred stock ("Preferred Stock") and Class A Stock purchase warrants (the "Warrants"). A total of $9.375 million of Preferred Stock and Warrants were sold and issued as of December 5, 1997, to several institutional investors. The Company is obligated to sell and issue, and the existing holders of the Preferred Stock are required to purchase, an additional $9.675 million of Preferred Stock and Warrants, following shareholder approval, which is required by NASDAQ rules. The $9.675 million of Preferred Stock and Warrants not yet sold are expected to close by early January 1998. Terms of the Financing Holders of Preferred Stock have the following rights, privileges and preferences: Term; Dividends and Illiquidity Payments. The Preferred Stock has a term of three years and pays a cumulative dividend of 8.0% per annum during any quarter in which the closing bid price for the Class A Stock is less than $8.00 for any 10 consecutive trading days. An equivalent payment is payable to any holder of Preferred Stock which is subject during any quarter to a standstill period (as described below) following a Base Ten underwritten public offering or which is non-convertible because of the limitations described below. Such dividends and payments are payable only prior to conversion, and payable in cash or additional Preferred Stock at Base Ten's option; however, if Base Ten elects to pay the dividend in Preferred Stock, the amount of such payment will be 125% of the cash amount due. Liquidation Preference. The Preferred Stock has a liquidation preference as to its principal amount and any accrued and unpaid dividends. Conversion Rights. The Preferred Stock is convertible at any time or from time to time into Class A Stock, at a conversion price equal to the lesser of (i) $16.25 per share or (ii) the Weighted Average Price of the Class A Stock prior to the conversion date. Weighted Average Price is defined as the volume weighted average price of Class A Stock on Nasdaq (as reported at the close of trading by Bloomberg Financial Markets) over any two trading days in the 20 trading day period ending on the day prior to the date the holder gives notice of conversion (excluding the lowest closing bid price in that period). The holder has the right to select such two days. In any event, no more than 3,040,000 shares of Class A Stock shall be issued upon conversion of all of the Preferred Stock. Any Preferred Stock remaining outstanding because of this limitation may be redeemed at the holder's option for a subordinated 8% promissory note maturing when the Preferred would have matured. Company Redemption Right. Base Ten has the right, at any time, to redeem all or any part of the outstanding Preferred Stock or subordinated notes at 130% of their original purchase price. Mandatory Redemption on Maturity. Any shares of Preferred Stock or subordinated notes still outstanding three years after issuance must be redeemed in either cash or, at Base Ten's option, in Class A Stock. If Base Ten elects to make the redemption in Class A Stock, the amount of such payment will be 125% of the original purchase price. Voting Rights. The holders of the Preferred Stock have the same voting rights as the holders of Class A Stock, calculated as if all outstanding shares of Preferred Stock had been converted into shares of Class A Stock on the record date for determination of shareholders entitled to vote on the matter presented. Warrants. For each $1 million of Preferred Stock purchased, purchasers received five-year warrants to purchase 40,000 shares of Class A Stock exercisable at $16.25 per share. Right of First Refusal. So long as shares of the Preferred Stock remain outstanding, each holder has the right (with certain exceptions) to purchase, on five days' notice, up to that portion of any future equity financing by Base Ten which would be sufficient to enable the holder to maintain its percentage interest in Base Ten equity on a fully diluted basis. Registration. Base Ten is required to file a registration statement ("Registration Statement") with the Securities and Exchange Commission ("SEC") registering for resale the Class A Stock underlying the Preferred Stock, including any Preferred Stock which may be issued as a dividend, and the Warrants, which must be effective no later than March 2, 1998. In the event the Registration Statement is not declared effective by the SEC by such date, Base Ten will be required to pay the holders of the Preferred an amount equal to 1 1/2% of the original purchase price for each month until the Registration Statement has been declared effective. The holders have agreed, if requested by a managing underwriter, to a maximum 90-day standstill period following any underwritten Base Ten public offering, but not in excess of two such standstills (or more than 90 days) in any 18-month period. In the event a standstill period is effective, the maturity date of the Preferred Stock would be extended by the duration of the standstill period. Use of Proceeds The proceeds of the sale of the Preferred are expected to be used for continued development of the Company's PHARMASYST(R) family of products, increased marketing activities, working capital, and acquisition financing. ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits (c) Exhibits 99.1 Securities Purchase Agreement 99.2 Registration Rights Agreement 99.3 Certificate of Amendment of Restated Certificate of Incorporation Providing for Designation, Preferences and Rights of the Convertible Preferred Shares, Series A 99.4 Common Stock Purchase Warrant Certificate 99.5 Press Release, dated as of December 9, 1997 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. BASE TEN SYSTEMS, INC. Date: December 18, 1997 By: /s/ Thomas E. Gardner --------------------- Name: Thomas E. Gardner Title: President and Chief Executive Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. BASE TEN SYSTEMS, INC. Date: November ____, 1997 By: _____________________________ Name: Edward J. Klinsport Title: Executive Vice President and Secretary Exhibit 99.1 SECURITIES PURCHASE AGREEMENT This SECURITIES PURCHASE AGREEMENT ("Agreement") is entered into as of December 4, 1997, by and between BASE TEN SYSTEMS, INC., a New Jersey corporation (the "Company"), with headquarters located at One Electronics Drive, Trenton, New Jersey 08619 and the purchasers ("Purchasers") set forth on the execution pages hereof. RECITALS A. The Company and Purchasers are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by the provisions of Regulation D ("Regulation D"), as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "Securities Act"). B. Purchasers desire (a) to purchase, upon the terms and conditions stated in this Agreement, in the aggregate at the First Closing and the Second Closing, Nineteen Million U.S. Dollars ($19,000,000) face amount of the Company's Convertible Preferred Shares (the "Preferred Shares"), in the form attached hereto as Exhibit A, convertible into shares of the Company's Class A Common Shares, par value $1.00 per share (the "Common Stock") and (b) to receive, in consideration for such purchase, Stock Purchase Warrants (the "Warrants"), in the form attached hereto as Exhibit B, to acquire shares of Common Stock. The shares of Common Stock issuable upon exercise of or otherwise pursuant to the Warrants are referred to herein as "Warrant Shares". The shares of Common Stock to be issued to the Purchasers upon conversion of the Preferred Shares are referred to herein as the "Common Shares". The Preferred Shares may be exchanged for senior subordinated notes (the "Notes") by the Purchasers under the terms and conditions specified in the Certificate of Amendment. The Preferred Shares, the Common Shares, the Warrants, the Warrant Shares and the Notes are collectively referred to herein as the "Securities". C. Contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement in the form attached hereto as Exhibit C (the "Registration Rights Agreement"), pursuant to which the Company has agreed to provide certain registration rights under the Securities Act, the rules and regulations promulgated thereunder and applicable state securities laws. AGREEMENTS NOW, THEREFORE, in consideration of their respective promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and each Purchaser hereby agree as follows: ARTICLE I PURCHASE AND SALE OF PREFERRED SHARES 1.1 Purchase of Preferred Shares. Subject to the terms and conditions of this Agreement, the issuance, sale and purchase of Nine Million Three Hundred Seventy Five Thousand U.S. Dollars ($9,375,000) face amount of the Preferred Shares shall be consummated in an initial closing (the "First Closing"). On the date of the First Closing, subject to the satisfaction or waiver of the conditions set forth in Article VI and Section 7.1, the Company shall issue and sell to the Purchasers, and the Purchasers severally and not jointly agree to purchase from the Company, the Preferred Shares specified below the signature for each such Purchaser on this agreement for an aggregate purchase price of Nine Million Three Hundred Seventy Five Thousand U.S. Dollars ($9,375,000) (the "Initial Purchase Price"). Subject to the terms and conditions of this Agreement, the issuance, sale and purchase of Nine Million Six Hundred Twenty Five Thousand U.S. Dollars ($9,625,000) face amount of the Preferred Shares shall be consummated in a second closing (the "Second Closing," the first Closing and the Second Closing are collectively referred to as the "Closing"). On the date of the Second Closing, subject to the satisfaction or waiver of the conditions set forth in Section 7.2, the Company shall issue and sell to the Purchasers, and the Purchasers severally and not jointly agree to purchase from the Company, the Preferred Shares specified below the signature for each such Purchaser on this agreement for an aggregate purchase price of Nine Million Six Hundred Twenty Five Thousand U.S. Dollars (the "Additional Purchase Price," and, together with the Initial Purchase Price, the "Purchase Price"). 1.2 Form of Payment. The Purchasers shall pay the Initial Purchase Price and the Additional Purchase Price for the Preferred Shares by wire transfer to the account designated pursuant to the Escrow Agreement by and among the Company, the Purchasers and the escrow agent ("Escrow Agent") designated therein in the form attached hereto as Exhibit D ("Escrow Agreement") upon delivery to the Escrow Agent of the Preferred Shares and, at the First Closing, the Warrants, all in accordance with the terms of the Escrow Agreement, and upon satisfaction of the other Closing conditions. 1.3 First Closing Date. Subject to the satisfaction (or waiver) of the conditions set forth in Article VI and Section 7.1 below, and further subject to the terms and conditions of the Escrow Agreement, the date and time of First Closing shall be at 10:00 a.m. California time, on December 4, 1997 (the "First Closing"). 1.4 Second Closing Date. Subject to the satisfaction (or waiver) of the conditions set forth in Section 7.2 below, and further subject to the terms and conditions of the Escrow Agreement, the date and time of Second Closing shall be at 10:00 a.m. California time, on December 30, 1997, or such other date upon which the conditions set forth in Section 7.2 have been satisfied. 1.5 Warrants. In consideration of the purchase by Purchasers of the Preferred Shares, the Company shall at the First Closing and at the Second Closing, as applicable, issue Warrants to the Purchasers to acquire an aggregate of 40,000 Common Shares for each $1,000,000 face amount of Preferred Shares purchased. ARTICLE II PURCHASERS' REPRESENTATIONS AND WARRANTIES Each Purchaser represents and warrants to the Company as of the date hereof and as of the Closing, severally and solely with respect to itself and its purchase hereunder and not with respect to any other Purchaser, as set forth in this Article II. Each Purchaser makes no other representations or warranties, express or implied, to the Company in connection with the transactions contemplated hereby and any and all prior representations and warranties, if any, which may have been made by the Purchaser to the Company in connection with the transactions contemplated hereby shall be deemed to have been merged in this Agreement and any such prior representations and warranties, if any, shall not survive the execution and delivery of this Agreement. 2.1 Investment Purpose. Purchaser is purchasing the Preferred Shares and the Warrants for Purchaser's own account for investment only and not with a present view toward or in connection with the public sale or distribution thereof in violation of the applicable securities laws. Purchaser will not, directly or indirectly, offer, sell, pledge or otherwise transfer the Securities or any interest therein except pursuant to transactions that are exempt from the registration requirements of the Securities Act and/or sales registered under the Securities Act, the rules and regulations promulgated pursuant thereto and applicable state securities laws. Purchaser understands that Purchaser must bear the economic risk of this investment indefinitely, unless the Securities are registered pursuant to the Securities Act and any applicable state securities laws or an exemption from such registration is available, and that the Company has no present intention of registering any such Securities other than as contemplated by the Registration Rights Agreement. By making the representations in this Section 2.1, the Purchaser does not agree to hold the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption from registration under the Securities Act and any applicable state securities laws. 2.2 Accredited Investor Status. Purchaser is an "accredited investor" as that term is defined in Rule 501(a) of Regulation D and Purchaser has indicated on a duly executed Investor Questionnaire and Representation Agreement in the form attached hereto as Exhibit E in which capacity that it so qualifies as an "accredited investor." 2.3 Reliance on Exemptions. Purchaser understands that the Preferred Shares, Notes and Warrants are being offered and sold to Purchaser in reliance upon specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and Purchaser's compliance with, the representations, warranties, agreements, acknowledgments and understandings of Purchaser set forth herein in order to determine the availability of such exemptions and the eligibility of Purchaser to acquire the Preferred Shares, Notes and Warrants. 2.4 Information. Purchaser has been furnished all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities which have been specifically requested by Purchaser, including without limitation the Company's Annual Report on Form 10-K/A for the Year ended October 31, 1996; Quarterly Report on Form 10-Q for the period ended January 31, 1997, as amended by Forms 10-Q/A filed with the Securities and Exchange Commission ("SEC") on April 3, 1997, May 28, 1997, and June 11, 1997, respectively; Quarterly Report on Form 10-Q for the period ended April 30, 1997; Quarterly Report on Form 10-Q for the period ended July 31, 1997 (the "Current Quarterly Report"); Current Reports on Form 8-K filed with the SEC on June 13, 1997, June 9, 1997 and November 11, 1997; Preliminary Proxy Statement filed with the SEC on October 29, 1997; and Proxy Statement filed with the SEC on February 7, 1997 (such documents, collectively, the "SEC Documents"). Purchaser has been afforded the opportunity to ask questions of the Company and has received what Purchaser believes to be complete and satisfactory answers to any such inquiries. Neither such inquiries nor any other due diligence investigation conducted by Purchaser or any of its representatives nor any other disclosures or documents (including without limitation the SEC Documents) shall modify, amend or affect Purchaser's right to rely on the Company's representations and warranties contained in this Agreement or in any Exhibit hereto or in any certificate issued in connection herewith or therewith. Purchaser understands that Purchaser's investment in the Securities involves a high degree of risk, including without limitation the risks and uncertainties disclosed in the SEC Documents and the Prospectus (as defined below). Subject to the foregoing, Purchaser acknowledges the disclosures presented under the caption "Risk Factors" in the Prospectus dated August 22, 1997 included in the Company's Form S-3 Registration Statement filed with the SEC, and the incorporation of those disclosures by reference herein. 2.5 Governmental Review. Purchaser understands that no United States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement of the Securities. 2.6 Transfer or Resale. Purchaser understands that (i) except as provided in the Registration Rights Agreement, the Securities have not been and are not being registered under the Securities Act or any state securities laws, and may not be offered, sold, pledged or otherwise transferred unless subsequently registered thereunder or an exemption from such registration is available (which exemption the Company expressly agrees may be established as contemplated in clauses (b) and (c) of Section 5.1 hereof); (ii) any sale of such Securities made in reliance on Rule 144 under the Securities Act (or a successor rule) ("Rule 144") may be made only in accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of such Securities without registration under the Securities Act under circumstances in which the seller may be deemed to be an underwriter (as that term is defined in the Securities Act) may require compliance with some other exemption under the Securities Act or the rules and regulations of the SEC thereunder; and (iii) neither the Company nor any other person is under any obligation to register such Securities under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder (in each case, other than pursuant to this Agreement or the Registration Rights Agreement). Notwithstanding the foregoing or anything else contained herein to the contrary, the Securities may be pledged as collateral in connection with any margin account or other lending arrangement. 2.7 Legends. Purchaser understands that, subject to Article V hereof, the certificates for the Preferred Shares and Warrants, the Notes and, until such time as the Common Shares and Warrant Shares have been registered under the Securities Act as contemplated by the Registration Rights Agreement or otherwise may be sold by Purchaser pursuant to Rule 144 (subject to and in accordance with the procedures specified in Article V hereof), the certificates for the Common Shares and Warrant Shares, will bear a restrictive legend (the "Legend") in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS OR UNLESS OFFERED, SOLD OR TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS. 2.8 Authorization: Enforcement. This Agreement and the Registration Rights Agreement have been duly and validly authorized, executed and delivered on behalf of Purchaser and are valid and binding agreements of Purchaser enforceable in accordance with their respective terms, except (i) to the extent that such validity or enforceability may be subject to or affected by any bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors' rights or remedies of creditors generally, or by other equitable principles of general application, and (ii) as rights to indemnity and contribution under the Registration Rights Agreement may be limited by Federal or state securities laws. 2.9 Residency. Purchaser is a resident of the jurisdiction set forth under Purchaser's name on the signature page hereto executed by Purchaser. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the Purchaser as of the date hereof and as of each Closing as set forth in this Article III. The Company makes no other representations or warranties, express or implied, to the Purchasers in connection with the transactions contemplated hereby and any and all prior representations and warranties, if any, which may have been made by the Company to the Purchasers in connection with the transactions contemplated hereby shall be deemed to have been merged in this Agreement and any such prior representations and warranties, if any, shall not survive the execution and delivery of this Agreement. 3.1 Organization and Qualification. Each of the Company and its subsidiaries is a corporation duly organized and existing in good standing under the laws of the jurisdiction in which it is incorporated, and has the requisite corporate power to own its properties and to carry on its business as now being conducted. The Company and each of its subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction where the failure so to qualify or be in good standing would have a Material Adverse Effect. "Material Adverse Effect" means any effect which, individually or in the aggregate with all other effects, is or could reasonably be expected to be materially adverse to the business, operations, properties, financial condition, operating results or prospects of the Company and its subsidiaries, taken as a whole on a consolidated basis or on the transactions contemplated hereby or on any of the Securities. 3.2 Authorization: Enforcement. (a) The Company has the requisite corporate power and authority to enter into and perform this Agreement and the Registration Rights Agreement, and to issue, sell and perform its obligations with respect to the Preferred Shares, Warrants and Notes in accordance with the terms hereof and the terms of the Preferred Shares, Warrants and Notes, to issue the Common Shares and Warrant Shares upon conversion of the Preferred Shares and exercise of the Warrants, respectively, in accordance with the terms and conditions of the Preferred Shares and Warrants, respectively, and subject to the limitations set forth in Sections 14A:7-14.1 and 14A:7-16 of the New Jersey Business Corporation Act (the "Corporate Law Restrictions") to issue the Notes in accordance with the terms and conditions of the Preferred Shares; (b) the execution, delivery and performance of this Agreement and the Registration Rights Agreement by the Company and the consummation by it of the transactions contemplated hereby and thereby (including without limitation the issuance of the Preferred Shares, the Notes and the Warrants, and the issuance and reservation for issuance of the Common Shares and the Warrant Shares) have been duly authorized by all necessary corporate action and, except as set forth on Schedule 3.2 hereof and except as contemplated by Section 4.8 hereof, no further consent or authorization of the Company, its board of directors, or its stockholders or any other person, body or agency, and no filing with any person, body or agency, is required with respect to any of the transactions contemplated hereby or thereby (whether under rules of the National Association of Securities Dealers ("NASD") or otherwise); (c) this Agreement, the Registration Rights Agreement, certificates for the Preferred Shares, the Warrants and the Notes have been (or, in the case of the Notes, will be upon issuance) duly executed and delivered by the Company; and (d) this Agreement, the Registration Rights Agreement, the Preferred Shares, and the Warrants constitute, and the Notes, when issued, will constitute, legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, except (i) to the extent that such validity or enforceability may be subject to or affected by any bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors' rights or remedies of creditors generally, or by other equitable principles of general application, and (ii) as rights to indemnity and contribution under the Registration Rights Agreement may be limited by Federal or state securities laws, and (iii) as to the Notes, to the Corporate Law Restrictions. 3.3 Capitalization. The capitalization of the Company as of the date hereof, including the authorized capital stock, the number of shares issued and outstanding, the number of shares reserved for issuance pursuant to the Company's stock option plans, the number of shares reserved for issuance pursuant to securities (other than the Preferred Shares or the Warrants) exercisable for, or convertible into or exchangeable for any shares of Common Stock and the number of shares to be reserved for issuance upon conversion of the Preferred Shares and exercise of the Warrants is set forth in the Current Quarterly Report, as the same may be modified or supplemented by Schedule 3.3. All of such outstanding shares of capital stock have been, or upon issuance will be, validly issued, fully paid and nonassessable. No shares of capital stock of the Company (including the Common Shares and the Warrant Shares) are subject to preemptive rights or any other similar rights of the stockholders of the Company or of any other person or entity which have not been satisfied or waived, or any liens or encumbrances. Except as disclosed in Schedule 3.3, as of the date of this Agreement and as of each Closing Date, (i) there are no outstanding options, warrants, scrip, rights to subscribe for, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exercisable or exchangeable for, any shares of capital stock of the Company or any of its subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries, and (ii) issuance of the Securities will not trigger antidilution or similar rights for any other present or future outstanding or authorized securities of the Company, and (iii) there are no agreements or arrangements under which the Company or any of its subsidiaries is obligated to register the sale of any of its or their securities under the Securities Act (except the Registration Rights Agreement). The Company has furnished to Purchaser true and correct copies of the Company's Certificate of Incorporation as in effect on the date hereof ("Certificate of Incorporation"), and the Company's By-laws as in effect on the date hereof (the "By-laws"). The Company has set forth on Schedule 3.3 all instruments and agreements (other than the Certificate of Incorporation and By-laws) governing or concerning securities convertible into or exercisable or exchangeable for Common Shares of the Company (and the Company shall provide to Purchaser copies thereof upon the request of Purchaser). 3.4 Issuance of Shares. The Common Shares and Warrant Shares are duly authorized and (except for the issuance of shares of Common Stock in excess of twenty percent (20%) of the Common Stock outstanding at the First Closing Date, which is subject to the completion of the actions to be taken by the Company and its stockholders after the First Closing pursuant to Section 4.8) reserved for issuance, and, upon conversion of the Preferred Shares and exercise of the Warrants in accordance with the terms thereof, as applicable, will be validly issued, fully paid and non-assessable, and free from all taxes, liens, claims and encumbrances directly or indirectly imposed or suffered by the Company or any of its subsidiaries, will be entitled to all rights and preferences accorded to a holder of Common Stock, shall be entitled to be traded on the same markets and exchanges as the other shares of Common Stock of the Company are traded, and will not be subject to preemptive rights or other similar rights of stockholders of the Company or of any other person or entity. The Preferred Shares and Warrants are duly authorized and validly issued, fully paid and nonassessable, and free from all liens, claims and encumbrances directly or indirectly imposed or suffered by the Company or any of its subsidiaries or affiliates and will not be subject to preemptive rights or other similar rights of stockholders of the Company or of any other person or entity. 3.5 No Conflicts. Except for the issuance of shares of Common Stock in excess of twenty percent (20%) of the outstanding Common Stock, which is subject to the completion of the actions to be taken by the Company and its stockholders after the First Closing pursuant to Section 4.8, the execution, delivery and performance of this Agreement, the Preferred Shares, the Warrants, the Notes and the Registration Rights Agreement by the Company, and the consummation by the Company of transactions contemplated hereby and thereby (including, without limitation, the issuance and reservation for issuance, as applicable, of the Preferred Shares, Common Shares, Warrants, Warrant Shares and, subject to the Corporate Law Restrictions, Notes) will not (a) result in a violation of the Certificate of Incorporation or By-laws or (b) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, including without limitation that certain Securities Purchase Agreement dated as of May 30, 1997 and the documents related thereto, or (c) result in a violation of any law, rule, regulation, order, judgment or decree (including U.S. federal and state securities laws and regulations and the rules and regulations of the NASD or Nasdaq) applicable to the Company or any of its subsidiaries, or by which any property or asset of the Company or any of its subsidiaries, is bound or affected. Neither the Company nor any of its subsidiaries is in violation of its Certificate of Incorporation or other organizational documents, and neither the Company nor any of its subsidiaries is in default (and no event has occurred which has not been waived which, with notice or lapse of time or both, would put the Company or any of its subsidiaries in default) under, nor has there occurred any event giving others (with notice or lapse of time or both) any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, except for possible violations, defaults or rights as would not, individually or in the aggregate, have a Material Adverse Effect. The businesses of the Company and its subsidiaries are not being conducted, and shall not be conducted so long as Purchaser (or any direct or indirect transferee, assignee or participant of Purchaser or of such transferee, assignee or participant in a transaction of the type referred to in Section 5.1(b) below ("Purchaser Transferee")) owns any of the Securities, in violation of any law, ordinance or regulation of any governmental entity, except for possible violations the sanctions for which either individually or in the aggregate would not have a Material Adverse Effect. Except as set forth on Schedule 3.5, or except (A) such as may be required under the Securities Act in connection with the performance of the Company's obligations under the Registration Rights Agreement, (B) filing of a Form D with the SEC, and (C) compliance with the state securities or Blue Sky laws of applicable jurisdictions, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency or any regulatory or self-regulatory agency in order for it to execute, deliver or perform any of its obligations under this Agreement, the Preferred Shares, the Warrants, the Notes or the Registration Rights Agreement or to perform its obligations in accordance with the terms hereof or thereof. The Company is not in violation of the listing requirements of Nasdaq, does not know of or anticipate any event which could be grounds for such delisting and does not reasonably anticipate that the Common Shares will be delisted by Nasdaq during the foreseeable future. 3.6 SEC Documents. Except as disclosed in Schedule 3.6, since October 31, 1996, the Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company has delivered to each Purchaser true and complete copies of the SEC Documents, except for exhibits, schedules and incorporated documents. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. None of the statements made in any such SEC Documents which is required to be updated or amended under applicable law has not been so updated or amended. The financial statements of the Company included in the SEC Documents have been prepared in accordance with U.S. generally accepted accounting principles, consistently applied, and the rules and regulations of the SEC during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they do not include footnotes or are condensed or summary statements) and fairly present in all material respects the consolidated financial position of the Company and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal, immaterial year-end audit adjustments). Except as set forth in the financial statements or the notes thereto of the Company included in the SEC Documents, the Company has no liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business consistent with past practice subsequent to the date of such financial statements and (ii) obligations under contracts and commitments incurred in the ordinary course of business consistent with past practice and (iii) liabilities not required under generally accepted accounting principles to be reflected in such financial statements, in each case of clause (i), (ii) and (iii) next above which, individually or in the aggregate, are not material to the financial condition, business, operations, properties, operating results or prospects of the Company and its subsidiaries or to the transactions contemplated hereby or to the Securities. To the extent required by the rules of the SEC applicable thereto, the SEC Documents contain a complete and accurate list of all material undischarged written or oral contracts, agreements, leases or other instruments existing as of the respective date of each such SEC Document (or such other date required by the rules of the SEC) to which the Company or any subsidiary is a party or by which the Company or any subsidiary is bound or to which any of the properties or assets of the Company or any subsidiary is subject (each a "Contract"). Except as set forth in Schedule 3.6, none of the Company, its subsidiaries or, to the best knowledge of the Company, any of the other parties thereto, is in breach or violation of any Contract, which breach or violation could reasonably be expected to have a Material Adverse Effect. No event, occurrence or condition exists which, with the lapse of time, the giving of notice, or both, would become a default by the Company or its subsidiaries thereunder which could reasonably be expected to have a Material Adverse Effect. The Company has not provided and will not provide to any Purchaser any material non-public information or any other information which, according to applicable law, rule or regulation, should have been disclosed publicly by the Company but which has not been so disclosed as of the date of this Agreement and the date of the First Closing. 3.7 Absence of Certain Changes. Since October 31, 1996 and to the First Closing (or, at the Second Closing, since the First Closing to the Second Closing) there has been no material adverse change and no material adverse development in the business, properties, operations, financial condition, results of operations or prospects of the Company, except as disclosed in Schedule 3.7 or in the SEC Documents. The sale of the assets of the Government Technology Division of the Company is, as of the date hereof, proceeding in accordance with the previous public announcements of the Company regarding such sale. 3.8 Absence of Litigation. Except as disclosed in Schedule 3.8 or in the SEC Documents, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, or self-regulatory organization or body pending or, to the knowledge of the Company or any of its subsidiaries, threatened against or affecting the Company, any of its subsidiaries, or any of their respective directors or officers in their capacities as such, which could reasonably be expected to result in an unfavorable decision, ruling or finding which would have a Material Adverse Effect or would adversely affect the transactions contemplated by this Agreement or any of the documents contemplated hereby or which would adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement or any of such other documents. There are no facts known to the Company which, if known by a potential claimant or governmental authority, could reasonably be expected to give rise to a claim or proceeding which, if asserted or conducted with results unfavorable to the Company or any of its subsidiaries, could reasonably be expected to have a Material Adverse Effect. 3.9 Disclosure. No information, statement or representation relating to or concerning the Company or any of its subsidiaries set forth in this Agreement contains an untrue statement of a material fact. No information relating to or concerning the Company or any of its subsidiaries set forth in any of the SEC Documents contains a statement of material fact that was untrue as of the date such SEC Document was filed with the SEC. The Company has not herein or in the SEC Documents omitted to state a material fact necessary in order to make the statements and representations made herein or therein, in light of the circumstances under which they were made, not misleading. 3.10 Acknowledgment Regarding Purchaser's Purchase of the Securities. The Company acknowledges and agrees that Purchaser is not acting as a financial advisor or fiduciary of the Company or any of its subsidiaries (or in any similar capacity) with respect to this Agreement or the transactions contemplated hereby, that this Agreement and the transaction contemplated hereby, and the relationship between the Purchaser and the Company, are "arms-length", and that any statement made by Purchaser (except as set forth in Article II) or any of its representatives or agents, in connection with this Agreement, and the transactions contemplated hereby is not advice or a recommendation, is merely incidental to Purchaser's purchase of the Securities and (except as set forth in Article II) has not been relied upon as such in any way by the Company, its officers or directors. The Company further represents to Purchaser that the Company's decision to enter into this Agreement and the transactions contemplated hereby have been based solely on an independent evaluation by the Company and its representatives. 3.11 S-3 Registration. The Company is currently eligible to register the resale of the Common Shares on a registration statement on Form S-3 under the Securities Act. 3.12 No General Solicitation. Neither the Company nor any distributor participating on the Company's behalf in the transactions contemplated hereby (if any) nor any person acting for the Company, or any such distributor, has conducted any "general solicitation," as described in Rule 502(c) under Regulation D, with respect to any of the Securities being offered hereby. 3.13 No Integrated Offering. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would either require registration of any of the Securities under the Act or prevent the parties hereto from consummating, or delay or interfere with the consummation of, the transactions contemplated hereby pursuant to an exemption from the registration under the Securities Act pursuant to the provisions of Regulation D. The transactions contemplated hereby are exempt from the registration requirements of the Securities Act, assuming the accuracy of the relevant representations and warranties herein contained of the Purchaser and of Cowen & Company ("Cowen") and Shoreline Pacific Institutional Finance, the Institutional Division of Financial West Group ("Shoreline") in their letters to the Company dated as of December 2, 1997 (copies of which are attached as Schedule 3.13 hereto) to the extent relevant for such determination. To the Company's knowledge, such representations and warranties of Cowen and Shoreline are accurate. The issuance of the Securities to the purchasers will not be integrated with any other issuance of the Company's securities (past, present or future) which require stockholder approval under the rules of Nasdaq. 3.14 No Brokers. The Company has taken no action, directly or indirectly, which would give rise to any claim by any person for brokerage commissions, finder's fees or similar payments by Purchaser relating to this Agreement or the transactions contemplated hereby, except for dealings with Cowen and Shoreline the fees of which shall be paid in full by the Company out of escrow at the First Closing. The Company will indemnify the Purchaser from and against any fees and expenses (including without limitation reasonable attorneys fees and expenses) sought or other claims made by Cowen or Shoreline. 3.15 Intellectual Property. Except as disclosed in the SEC Documents, each of the Company and its subsidiaries owns, is licensed to use, or possesses adequate and enforceable rights to use all material patents, patent applications, trademarks, trademark applications, trade names, service marks, copyrights, copyright applications, licenses, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) and other similar rights and proprietary knowledge (collectively, "Intangibles") used or necessary for the conduct of its business as now being conducted and as described in the Company's Annual Report on Form 10-K/A for its most recently ended fiscal year. To the Company's best knowledge, except as disclosed in the SEC Documents, neither the Company nor any subsidiary of the Company infringes on or is in conflict with any right of any other person with respect to any Intangibles nor is there any claim of infringement made by a third party against or involving the Company or any of its subsidiaries, which infringement, conflict or claim, individually or in the aggregate, could reasonably be expected to result in an unfavorable decision, ruling or finding which would have a Material Adverse Effect. 3.16 Key Employees. Each Key Employee (as defined below) is currently serving the Company in the capacity disclosed in Schedule 3.16. No Key Employee, to the best of the knowledge of the Company and its subsidiaries, is, or is now expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement, non-competition agreement, or any other contract or agreement or any restrictive covenant, and the continued employment of each Key Employee does not subject the Company or any of its subsidiaries to any liability with respect to any of the foregoing matters. No Key Employee has, to the best of the knowledge of the Company and its subsidiaries, any intention to terminate his employment with, or services to, the Company or any of its subsidiaries. "Key Employee" means Mr. T. Gardner. 3.17 No "Poison Pill". The Company does not have in effect a shareholders rights plan or similar plan in the nature of a "poison pill". If the Company adopts such a plan, none of the Purchaser's Preferred Shares, Warrants, Common Shares and Warrant Shares will be deemed to trigger such plan. 3.18 Dilution. The Company acknowledges that the number of Common Shares and Warrant Shares may increase substantially in certain circumstances (subject to the limitation on issuance of Common Shares set forth in Section (d)(H)(i) of the Certificate of Amendment), including the circumstances where the trading price of the Company's Common Stock declines. The Company understands and acknowledges the potentially dilutive effect to the Common Stock upon the issuance of the Common Shares and the Warrant Shares upon conversion or exercise of the Preferred Shares or Warrants. The Company further acknowledges that its obligation to issue Common Shares and Warrant Shares upon conversion of the Preferred Shares or exercise of the Warrants in accordance with this Agreement, the Certificate of Amendment and the Warrants is absolute and unconditional regardless of the dilutive effect such issuance has on the ownership interests of other stockholders of the Company. 3.19 Certain Transactions. Except as disclosed in the SEC Documents and except for arm's length transactions pursuant to which the Company or any of its direct or indirect subsidiaries makes payments in the ordinary course of business upon terms no less favorable than the Company or any of its direct or indirect subsidiaries could obtain from third parties, none of the officers, directors, or employees of the company is presently a party to any transaction with the Company or any of its direct or indirect subsidiaries (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. 3.20 Permits; Compliance. The Company and each of its direct and indirect subsidiaries is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exemptions, consents, certificates, approvals and orders necessary to own, lease, and operate its properties and to carry on its business as it is now being conducted (collectively, the "Company Permits"), and there is no action pending or, to the knowledge of the Company, threatened regarding suspension or cancellation of any of the Company Permits except for such Company Permits the failure of which to possess, or the cancellation or suspension of which, would not, individually or in the aggregate, have a Material Adverse Effect. Neither the Company nor any of its direct or indirect subsidiaries is in conflict with, or in default or violation of, any of the Company Permits, except for any such conflicts, defaults or violations which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. Since October 31, 1996, neither the Company nor any of its direct or indirect Subsidiaries has received any notification with respect to possible conflicts, defaults or violations of applicable laws, except for notices relating to possible conflicts, defaults or violations, which conflicts, defaults or violations could not reasonably be expected to have a Material Adverse Effect. 3.21 Insurance. The Company and each of its direct and indirect subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its direct and indirect subsidiaries are engaged. Neither the Company nor any such direct or indirect subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect. ARTICLE IV COVENANTS 4.1 Best Efforts. The parties shall use their reasonable best efforts to timely satisfy each of the conditions described in Articles VI and VII of this Agreement. 4.2 Securities Laws. The Company agrees to timely file a Form D with respect to the Securities with the SEC as required under Regulation D and to provide a copy thereof to each Purchaser promptly after such filing. The Company agrees to file a Form 8-K disclosing this Agreement and the transactions contemplated hereby with the SEC within five (5) business days following the date of the First Closing. The Company shall, on or prior to the date of First Closing or the Second Closing, as applicable, take such action as is necessary to qualify the Securities for sale to the Purchaser at such Closing in compliance with applicable securities laws of the states of the United States or obtain exemption therefrom, and shall provide evidence of any such action so taken to the Purchaser on or prior to the date of such Closing. 4.3 Reporting Status. So long as the Purchaser or a Purchaser Transferee beneficially owns any unconverted Preferred Shares or unexercised Warrants, (a) the Company shall timely file all reports required to be filed with the SEC pursuant to the Exchange Act, and the Company shall not terminate its status as an issuer required to file reports under the Exchange Act even if the Exchange Act or the rules and regulations thereunder would permit such termination, and (b) the Company will use its best efforts to maintain its ability and eligibility to register its Common Shares and Warrant Shares on Form S-3. 4.4 Information. The Company agrees to send the following reports to the Purchaser and Purchaser's Transferee until each Purchaser and Purchaser's Transferee has converted all of its Preferred Shares and exercised all Warrants: (a) within three (3) business days after the filing with the SEC, a copy of its Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q, any proxy statements and any Current Reports on Form 8-K; and (b) within one (1) business day after release, copies of all press releases issued by the Company or any of its subsidiaries. The Company further agrees to promptly provide to the Purchaser and Purchaser's Transferee any information with respect to the Company, its properties, or its business or Purchaser's investment as the Purchaser and Purchaser's Transferee may reasonably request; provided, however, that the Company shall not be required to give the Purchaser any material nonpublic information. If any information requested by the Purchaser from the Company contains material nonpublic information, the Company shall inform the Purchaser in writing that the information requested contains material nonpublic information and shall in no event provide such information to Purchaser without the express written consent of the Purchaser after being so informed. 4.5 Listing. The Company shall use its best efforts to continue the uninterrupted listing and trading of its Common Stock and, upon registration, the Common Shares and Warrant Shares on the AMEX, the Nasdaq National Market or the New York Stock Exchange; and comply in all material respects with the Company's reporting, filing and other obligations under the By-laws and rules of such exchange or Nasdaq, as applicable. If and so long as the Common Stock and, following registration, the Common Shares and Warrant Shares are not listed on one of such exchanges or Nasdaq, as partial compensation for the added liquidity risk of such delisting the Company shall be obligated to make the following additional cash payments (the "Delisting Payments"). The Delisting Payments will be equal to one-half of one percent (1/2%) of the Purchase Price of any outstanding Preferred Shares for each month (or part thereof, pro-rated) following the date the Common Stock is delisted (the "Delisting Date") continuing through the date the Common Stock is listed on one of such exchanges or Nasdaq (the "New Listing"). The Delisting Payments will be paid to the holder of the Preferred Shares in cash within five (5) business days following the earlier of (i) the end of each month following the Delisting Date, or (ii) the effective date of the New Listing. Nothing herein shall limit the Preferred Share holder's right to pursue actual damages for the Company's failure to maintain its listing on such exchange or Nasdaq. 4.6 Prospectus Delivery Requirement. The Purchaser understands that the Securities Act may require delivery of a prospectus relating to the Common Shares in connection with any sale thereof pursuant to a registration statement under the Securities Act covering the resale by the Purchaser of the Common Shares being sold, and the Purchaser shall comply with the applicable prospectus delivery requirements of the Securities Act, if any, in connection with any such sale. 4.7 Share Authorization. The Company covenants and agrees that it shall (i) use its best efforts to solicit by proxy the authorization (the "Shareholder Approval") of the issuance of shares of Common Stock in excess of twenty (20) percent of the outstanding shares of Common Stock by the stockholders of the Company not later than 60 days following the date of the First Closing, and (ii) use its best efforts to obtain the Shareholder Approval not later than 120 days following the date of the First Closing. 4.8 Pre-emptive Right to Participate in Future Private Equity Financings. (a) The Company shall not, prior to the later of (i) the Second Closing or (ii) the date of effectiveness of a registration statement with respect to the resale of the Common Shares and Warrant Shares (such earlier date, the "Release Date"), issue Class A Common Shares or securities which are convertible into or exercisable for Class A Common Shares or any other classes of common shares of the Company (a "Private Equity Financing"), except for Permitted Issuances (as defined below). If at any time after the Release Date and prior to conversion or redemption of all of the Preferred Shares, the Company proposes a Private Equity Financing, other than a Permitted Issuance, the Company shall give each Purchaser the opportunity to purchase its pro rata share (as calculated below) of such Private Equity Financing on the same terms as offered to other persons, on the terms described below. For purposes of this Section 4.9(a), "Permitted Issuance" means any issuance (i) pursuant to any currently outstanding convertible debentures, warrants or options (including shares issued in lieu of cash interest payments), (ii) pursuant to options either already granted or which may be granted to employees or consultants pursuant to the Company's existing employee stock option plans or any successor plan approved by the Company's board of directors, (iii) pursuant to the conversion of the Preferred Shares or exercise of the Warrants, (iv) pursuant to any stock dividend upon, or upon any subdivision or combination of shares of the Class A Common Shares, (v) pursuant to a firm commitment underwritten public offering, (vi) in connection with an acquisition or merger of another company by or with the Company or (vii) in connection with any future equity financing whereby Class A Common Shares, or warrants or options to purchase Class A Common Shares, are issued to a Strategic Investor (as defined in Section 4.9(d) hereof). (b) Each Purchaser shall have the right to purchase its pro rata share of such Private Equity Financing based on the ratio which (x) the Class A Common Shares issuable on conversion or exercise of Preferred Shares or Warrants purchased by such Purchaser on the Closing Date to (y) all of the then issued and outstanding Class A Common Shares of the Company plus the Class A Common Shares then issuable upon conversion or exercise of any preferred stock, any warrants and any convertible debentures, options and other warrants then outstanding, before giving effect to the proposed Private Equity Financing. (c) The Company shall deliver to each Purchaser, at least five (5) business days prior to the closing of such Private Equity Financing, written notice describing the terms and conditions of the proposed Private Equity Financing, and providing each Purchaser the opportunity to purchase its pro rata share (as calculated above) of the Private Equity Financing. Any portion of the Private Equity Financing required to be so offered and so offered which is not purchased (or irrevocably committed to be purchased) by a Purchaser within five (5) business days following the receipt by the Purchasers of such offer may be sold by the Company at any time thereafter on the same terms set forth in the offer, provided, however, that if the Company does not consummate such Private Equity Financing within twenty (20) business days after receipt by the Purchasers of the written notice noted in this Section 4.9(c), the rights of the Purchasers under this Section 4.9 shall again apply to such Private Equity Financing. (d) For the purposes of this Section 4.9, "Strategic Investor" shall mean any person or entity which has or is proposed to have a material business, technology or commercial relationship with the Company in addition to any equity financing provided by such person or entity. (e) So long as any of the Preferred Shares are outstanding the Company shall not issue any additional shares of Class B Common Stock, other than upon exercise of existing options to purchase Class B Common Stock. 4.9 Sale of Division. Each Purchaser covenants and agrees that it shall vote all Preferred Shares or Common Shares which it owns or subsequently acquires in favor of the proposed sale by the Company, described in the SEC Documents, of substantially all of the assets of the Government Technology Division of the Company to Strategic Technology Systems, Inc., a Nevada corporation. ARTICLE V LEGEND REMOVAL, TRANSFER, CERTAIN SALES, ADDITIONAL SHARES 5.1 Removal of Legend. The Legend shall be removed and the Company shall issue, or shall cause to be issued, a certificate without such Legend to the holder of any Security upon which it is stamped, and a certificate for a security shall be originally issued without the Legend, if: (a) the resale of such Security is registered under the Securities Act; or (b) such holder provides the Company with an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions and reasonably satisfactory to the Company and its counsel (the reasonable cost of which shall be borne by the Company if neither an effective registration statement under the Securities Act or Rule 144 is available in connection with such sale) to the effect that a public sale or transfer of such Security may be made without registration under the Securities Act pursuant to an exemption from such registration requirements; or (c) such Security can be sold pursuant to Rule 144, the Holder provides the Company with reasonable assurances that the Security can be so sold without restriction, and a registered broker dealer provides to the Company's transfer agent and counsel copies of (i) a "will sell" letter satisfying the guidelines established by the SEC and its staff from time to time and (ii) a customary seller's representation letter with respect to such a sale to be made pursuant to Rule 144 and (iii) a Form 144 in respect of such Security executed by such holder and filed (or mailed for filing) with the SEC; or (d) such Security can be sold pursuant to Rule 144(k). Each Purchaser agrees to sell all registered Securities, including those represented by a certificate(s) from which the Legend has been removed, or which were originally issued without the Legend, pursuant to an effective registration statement, in accordance with the manner of distribution described in such registration statement and, if required by the Securities Act, to deliver a prospectus in connection with such sale or in compliance with an exemption from the registration requirements of the Securities Act. In the event the Legend is removed from any Security or any Security is issued without the Legend and the Security is to be disposed of other than pursuant to the registration statement or pursuant to Rule 144, then prior to, and as a condition to, such disposition such Security shall be relegended as provided herein in connection with any disposition if the subsequent transfer thereof would be restricted under the Securities Act. Also, in the event the Legend is removed from any Security or any Security is issued without the Legend and thereafter the effectiveness of a registration statement covering the resale of such Security is suspended or the Company determines that a supplement or amendment thereto is required by applicable securities laws, then upon reasonable advance notice to Purchaser holding such Security, the Company may require that the Legend be placed on any such Security that cannot then be sold pursuant to an effective registration statement or Rule 144 or with respect to which the opinion referred to in clause (b) next above has not been rendered, which Legend shall be removed when such Security may be sold pursuant to an effective registration statement or Rule 144 or such holder provides the opinion with respect thereto described in clause (b) next above. 5.2 Transfer Agent Instructions. The Company shall instruct its transfer agent, in a form satisfactory to the Purchasers, to issue certificates, registered in the name of the Purchaser or its nominee, for the Common Shares and the Warrant Shares in such amounts specified from time to time by the Purchaser upon conversion or exercise of the Preferred Shares and the Warrants, respectively. Such certificates shall bear the Legend only to the extent provided by Section 5.1 above. The Company covenants that no instruction other than such instructions referred to in this Article V, and stop transfer instructions to give effect to Section 2.6 hereof in the case of the Common Shares and Warrant Shares prior to registration of the Common Shares and Warrant Shares under the Securities Act or "black-out" periods as provided in the Registrations Rights Agreement between the Company and the Purchaser, dated of such date herewith, will be given by the Company to its transfer agent and that the Securities shall otherwise be freely transferable on the books and records of the Company. Nothing in this Section shall affect in any way the Purchaser's obligations and agreement set forth in Section 5.1 hereof to resell the Securities pursuant to an effective registration statement and to deliver a prospectus as required in Section 5.1 in connection with such sale or in compliance with an exemption from the registration requirements of applicable securities laws. If (a) the Purchaser provides the Company with an opinion of counsel, which opinion of counsel shall be in form, substance and scope customary for opinions of counsel in comparable transactions and reasonably satisfactory to the Company and its counsel (the reasonable cost of which shall be borne by the Company if neither an effective registration statement under the Securities Act nor Rule 144 is available in connection with such sale), to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from registration or (b) the Purchaser transfers Securities to an affiliate which is an accredited investor (within the meaning of Regulation D under the Securities Act) and which delivers to the Company in written form the same representations, warranties and covenants made by Purchaser hereunder or pursuant to Rule 144, the Company shall permit the transfer, and, in the case of the Common Shares and Warrant Shares, promptly instruct its transfer agent to issue one or more certificates in such name and in such denomination as specified by the Purchaser. ARTICLE VI CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL 6.1 The obligation of the Company hereunder to issue and sell the Preferred Shares and Warrants to the Purchaser at the First Closing and the Second Closing is subject to the satisfaction, as of the date of each such Closing, of each of the following conditions, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion: (i) The Purchaser shall have executed the signature page to this Agreement, the Registration Rights Agreement and the Escrow Agreement and delivered the same to the Company and Shoreline. The Purchaser shall have completed and executed the Investor Questionnaire and Representation Agreement and delivered the same to the Company and Shoreline. (ii) The Purchaser shall have wired to the account of the Escrow Agent pursuant to the Escrow Agreement the Initial Purchase Price, in the case of the First Closing, and the Additional Purchase Price, in the case of the Second Closing. (iii) The representations and warranties of the Purchaser shall be true and correct in all material respects as of the date when made and as of such Closing as though made at that time (except for representations and warranties that speak as of a specific date, which representations and warranties shall be true and correct as of such date), and the Purchaser shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Purchaser at or prior to such Closing. (iv) No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which restricts or prohibits the consummation of any of the transactions contemplated by this Agreement. ARTICLE VII CONDITIONS TO THE PURCHASER'S OBLIGATION TO PURCHASE 7.1 The obligation of the Purchaser hereunder to purchase the Preferred Shares and Warrants to be purchased by it on the date of the First Closing is subject to the satisfaction as of the date of the First Closing, of each of the following conditions, provided that these conditions are for the Purchaser's sole benefit and may be waived by the Purchaser at any time in the Purchaser's sole discretion: (i) The Company shall have executed the signature page to this Agreement, the Registration Rights Agreement and the Escrow Agreement and delivered the same to Purchaser and Shoreline. (ii) The Company shall have delivered to the Escrow Agent duly issued Preferred Shares being so purchased by each Purchaser at the First Closing and certificates for the appropriate number of Warrants in such denominations as are reasonably requested by Purchaser. (iii) The Common Shares shall be listed on the Nasdaq National Market and trading in the Common Shares shall not have been suspended or limited by the NASD, Nasdaq or the SEC or other regulatory authority, and no such proceeding seeking suspension shall be pending. (iv) The representations and warranties of the Company shall be true and correct in all material respects as of the date when made and as of the First Closing as though made at that time (except for representations and warranties that speak as of a specific date, which representations and warranties shall be true and correct as of such date), and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the First Closing. Purchaser shall have received a certificate, executed by the Chief Executive Officer or Chief Financial Officer of the Company, dated as of the First Closing to the foregoing effect. (v) No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this Agreement. (vi) Purchaser shall have received an opinion of (i) Pitney Hardin, special New Jersey counsel to the Company, and (ii) Battle Fowler, special securities counsel to the Company, dated as of the First Closing, in the forms attached hereto as Exhibits F-1 and F-2, respectively. (vii) The Transfer Agent Instructions set forth in Section 5.2 shall have been delivered to the Company's transfer agent. (viii) The Certificate of Amendment shall have been filed with the Secretary of State of New Jersey. (ix) The Common Shares required to be authorized and reserved pursuant to Section (d)H(8) of the Certificate of Amendment shall have been duly authorized and reserved by the Company. 7.2 The obligation of the Purchaser hereunder to purchase the Preferred Shares to be purchased by it on the date of the Second Closing is subject to the satisfaction as of the date of the Second Closing, of each of the following conditions, provided that these conditions are for the Purchaser's sole benefit and may be waived by the Purchaser at any time in the Purchaser's sole discretion: (i) The First Closing shall have occurred, and no more than 120 days shall have passed since the date of the First Closing. (ii) The Shareholder Approval shall have been duly obtained; and a copy of the minutes of the meeting of the stockholders of the Company, certified by the Secretary of the Company as being true and correct, reflecting such approval shall have been provided to each Purchaser. (iii) The representations and warranties of the Company shall be true and correct in all material respects as of the date when made and as of the Second Closing as though made at that time (except for representations and warranties that speak as of a specific date, which representations and warranties shall be true and correct as of such date), and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Second Closing. Purchaser shall have received a certificate, executed by the Chief Executive Officer or Chief Financial Officer of the Company, dated as of the Second Closing to the foregoing effect. (iv) The Company shall have delivered to the Escrow Agent duly issued Preferred Shares being so purchased by each Purchaser at the Second Closing and certificates for the appropriate number of Warrants in such denominations as are reasonably requested by Purchaser. (v) The Common Shares shall be listed on the Nasdaq National Market and trading in the Common Shares shall not have been then suspended or limited by the NASD, Nasdaq or the SEC or other regulatory authority, and no such proceeding seeking suspension shall be pending. (vi) Purchaser shall have received a bring-down opinion of (i) Pitney Hardin, special New Jersey counsel to the Company, and (ii) Battle Fowler, special securities counsel to the Company, dated as of the Second Closing, addressing the matters referred to in the forms attached hereto as Exhibits F-1 and F-2, respectively. (vii) No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this Agreement following the Second Closing. ARTICLE VIII GOVERNING LAW; MISCELLANEOUS 8.1 Governing Law: Jurisdiction. This Agreement shall be governed by and construed in accordance with the corporate law of the Company's jurisdiction of incorporation (in respect of matters of corporation law) and the laws of the State of New York (in respect of all other matters) applicable to contracts made and to be performed in the State of New York. The parties hereto irrevocably consent to the jurisdiction of the United States federal courts and state courts located in the Borough of Manhattan in the State of New York in any suit or proceeding based on or arising under this Agreement or the transactions contemplated hereby and irrevocably agree that all claims in respect of such suit or proceeding may be determined in such courts. The Company and each Purchaser irrevocably waives the defense of an inconvenient forum to the maintenance of such suit or proceeding in such forum. The Company and each Purchaser further agrees that service of process upon the Company or such Purchaser, as applicable, mailed by the first class mail in accordance with Section 8.6 shall be deemed in every respect effective service of process upon the Company or such Purchaser in any suit or proceeding arising hereunder. Nothing herein shall affect any Purchaser's or the Company's right to serve process in any other manner permitted by law. The parties hereto agree that a final judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. The parties hereto irrevocably waive any right to trial by jury under applicable law. 8.2 Counterparts. This Agreement may be executed in two or more counterparts, including, without limitation, by facsimile transmission, all of which counterparts shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. In the event any signature page is delivered by facsimile transmission, the party using such means of delivery shall promptly cause additional original executed signature pages to be delivered to the other parties. 8.3 Headings. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. 8.4 Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. 8.5 Entire Agreement: Amendments. This Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Purchaser makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived other than by an instrument in writing signed by the party to be charged with enforcement and no provision of this Agreement may be amended other than by an instrument in writing signed by the Company and each Purchaser. 8.6 Notice. Any notice herein required or permitted to be given shall be in writing and may be personally served or delivered by nationally-recognized overnight courier or by facsimile machine confirmed telecopy, and shall be deemed delivered at the time and date of receipt (which shall include telephone line facsimile transmission). The addresses for such communications shall be: If to the Company: Base Ten Systems, Inc. One Electronics Drive Trenton, NJ 08619 Telephone: (609) 586-7010 Telecopy: (609) 586-1593 Attention: Mr. Alexander M. Adelson with a copy to: Battle Fowler LLP Park Avenue Tower 75 East 55th Street New York, NY 10022 Telephone: (212) 856-7000 Telecopy: (212) 856-7822 Attention: David M. Warburg, Esq. If to JMG Capital Partners, L.P.: JMG Capital Partners, L.P. 1999 Avenue of the Stars, Suite 1950 Los Angeles, CA 90067 Telephone: (310) 201-2619 Telecopy: (310) 201-2759 Attention: Mr. Jonathan Glaser If to Triton Capital Investments, Ltd.: Triton Capital Investments, Ltd. c/o JMG Capital Partners, L.P. 1999 Avenue of the Stars, Suite 1950 Los Angeles, CA 90067 Telephone: (310) 201-2619 Telecopy: (310) 201-2759 Attention: Mr. Jonathan Glaser If to RGC International Investors, LDC: RGC International Investors, LDC c/o Rose Glen Capital Management, L.P. RGC General Partner Corp 3 Bala Plaza East, Suite 200 251 St. Asaphs Road Bala Cynwyd, PA 19004 Telephone: (610) 617-5900 Telecopy: (610) 617-0570 Attention: Mr. Gary S. Kaminsky and with a copy to: Ballard, Spahr, Andrew Ingersoll 1735 Market Street 51st Floor Philadelphia, PA 19103-7599 Telephone: (215) 864-8123 Telecopy: (215) 864-8999 Attention: Mr. Keith S. Marlowe, Esq. If to Shepherd Investments International, Ltd.: Shepherd Investments International, Ltd. c/o Staro Asset Management 1500 West Market Street, Suite 200 Mequon, WI 53092 Telephone: (414) 241-1810 Telecopy: (414) 241-7704 Attention: Mr. Joe Lucas and with a copy to: Schulte Roth & Zabel LLP 900 Third Avenue New York, NY 10022 Telephone: (212) 756-2376 Telecopy: (212) 593-5955 Attention: Mr. Eleazer Klein, Esq. If to Stark International: Stark International c/o Staro Asset Management 1500 West Market Street, Suite 200 Mequon, WI 53092 Telephone: (414) 241-1810 Telecopy: (414) 241-7704 Attention: Mr. Joe Lucas and with a copy to: Schulte Roth & Zabel LLP 900 Third Avenue New York, NY 10022 Telephone: (212) 756-2376 Telecopy: (212) 593-5955 Attention: Mr. Eleazer Klein, Esq. If to Societe Generale: Societe Generale 1221 Avenue of the Americas 6th Floor New York, NY 10020 Telephone: (212) 278-5260 Telecopy: (212) 278-5467 Attention: Mr. Guillaume Pollet with a copy to: Dorsey & Whitney LLP 250 Park Avenue New York, NY 10177 Telephone: (212) 415-9263 Telecopy: (212) 888-0018 Attention: Mr. Eric Maki, Esq. If to Elara Ltd.: Elara Ltd. c/o Talisman Capital PO Box 438 Tropic Isle Building Wickhains Cay Road Town, Tortolla British Virgin Islands Telephone: (809) 494-2616 Telecopy: (809) 494-2794 Attention: Mr. Geoffrey Tirman If to Midland Walwyn Capital, Inc. Keyway Investments: Keyway Investments Midland Walwyn Capital, Inc. c/o Midland Walwyn Capital, Inc. BCE Place-181 Bay Street Suite 500 Toronto, Ontario M5J2V8 Canada Telephone: (416) 369-8738 Telecopy: (416) 369-8726 Attention: Mr. Gregory W. Murphy with a copy to: Kaufman Malchman Kirby & Squier 919 3rd Avenue 11th Floor New York, NY 10022 Telephone: (212) 371-6600 Telecopy: (212) 751-2540 Attention: Mr. Rick Stone, Esq. in each case with a copy to: Shoreline Pacific Institutional Finance 3 Harbor Drive, Suite 211 Sausalito, CA 94965 Telephone: (415) 332-7800 Telecopy: (415) 332-7808 Attention: General Counsel and: Cowen & Co. 1 Financial Square New York, NY 10005 Telephone: (212) 495-3950 Telecopy: (212) 495-8305 Attention: Mr. Bill Smith Each party shall provide notice to the other party of any change in address. 8.7 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. Neither the Company nor the Purchaser shall assign this Agreement or any rights or obligations hereunder without the prior written consent of the other except, with respect to the Company, in accordance with Section (d)G of the Certificate of Amendment. Notwithstanding the foregoing, the Purchaser may subject to and in compliance with Section 5.2 hereof, assign all or part of its rights and obligations hereunder to any of its "affiliates," as that term is defined under the Securities Act, without the consent of the Company so long as such affiliate is an accredited investor (within the meaning of Regulation D under the Securities Act) and agrees in writing to be bound by this Agreement. 8.8 Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns (including transferees permitted in accordance with Section 8.7) and is not for the benefit of, nor may any provision hereof be enforced by, any other person. 8.9 Survival; Indemnity. The representations and warranties of the Company and the Purchaser and the agreements and covenants set forth herein shall survive each Closing hereunder through the date three months following the fifth anniversary of this Agreement notwithstanding any due diligence investigation conducted by or on behalf of the Company or any Purchaser as the case may be. The Company agrees to indemnify and hold harmless each Purchaser and each of such Purchaser's respective officers, directors, employees, partners, agents and affiliates for loss or damage or expenses (including reasonable attorneys fees) arising as a result of or related to any breach or alleged breach by the Company of any of its respective representations or covenants set forth herein, in the Certificate of Amendment or in the Registration Rights Agreement, including advancement of expenses as they are incurred. 8.10 Public Filings: Publicity. As soon as practicable following the First Closing, the Company shall issue a press release with respect to the transactions contemplated hereby. The Company and each Purchaser shall have the right to review before issuance any press releases, SEC or Nasdaq or other exchange filings, or any other public statements with respect to the transactions contemplated hereby (which review shall not be unreasonably delayed); provided, however, that the Company shall be entitled, without the prior review of the Purchasers, to make any press release or SEC, AMEX, Nasdaq or other exchange filings with respect to such transactions as is required by applicable law and regulations (although the Company shall make all reasonable efforts to consult with the Purchasers in connection with any such press release prior to its release and shall provide the Purchasers with a copy thereof as provided in Section 4.4 hereof). Except to the extent required by law or with the prior written consent of the affected Purchaser, the Company shall not use the names of the Purchasers in press releases and public communications. Each of the Purchasers hereby consents to its identification as a Purchaser in any proxy solicitation seeking the Shareholder Approval. 8.11 Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. 8.12 Remedies. No provision of this Agreement providing for any remedy to a Purchaser or the Company shall limit any remedy which would otherwise be available to such Purchaser or the Company at law or in equity. Nothing in this Agreement shall limit any rights a Purchaser may have under any applicable federal or state securities laws with respect to the investment contemplated hereby. The Company and each Purchaser acknowledges that a breach by it of its respective obligations hereunder will cause irreparable harm to each Purchaser, in the case of the Company, and the Company, in the case of a Purchaser. Accordingly, the Company and each Purchaser acknowledges that the remedy at law for a material breach of its respective obligations under this Agreement will be inadequate and agrees, in the event of a breach or threatened breach by the Company or a Purchaser, as the case may be, of the provisions of this Agreement, that a Purchaser or the Company, as the case may be, shall be entitled, in addition to all other available remedies, to an injunction restraining any breach and requiring immediate compliance, without the necessity of showing economic loss and without any bond or other security being required. 8.13 Acknowledgment By Purchasers Who Are Also Holders Of The Company's Convertible Term Debentures. Any Purchaser under this Agreement who is also a holder ("Holder") of Convertible Term Debentures of the Company hereby acknowledges and agrees, solely with respect to the transactions contemplated by this Agreement and no other transaction, that any purchases made by Holder under this Agreement shall be in lieu of and in full and complete satisfaction of any right of first offer ("First Offer") with respect to the Securities such Holder may be entitled to under the first paragraph of Section 4(e) of that certain Securities Purchase Agreement, dated as of May 30, 1997, by and between the Company and each of The Tail Wind Fund, Ltd. and RGC International Investors, LDC. The Company hereby represents and warrants to the Purchasers that the Company has complied with and satisfied in full the First Offer to the extent not otherwise waived by a Holder with regard to the transactions contemplated by this Agreement. IN WITNESS WHEREOF, the undersigned Purchasers and the Company have caused this Agreement to be duly executed as of the date first above written. BASE TEN SYSTEMS, INC. By:_______________________ Name: Title: [SIGNATURES CONTINUED ONTO NEXT PAGE] PURCHASERS: JMG CAPITAL PARTNERS, L.P. By:_______________________ Name: Jonathan Glaser Title: President, JMG Capital Management, Inc. General Partner, JMG Capital Partners, L.P. DATE: Aggregate Subscription Amount Preferred Shares Purchased at First Closing: 246.711 Warrants Purchased at First Closing: 9,868 Preferred Shares Purchased at Second Closing: 253.289 Warrants Purchased at Second Closing: 10,132 TRITON CAPITAL INVESTMENTS, LTD By:_______________________________ Jonathan Glaser Vice President, Triton Capital Investments, Ltd. DATE: Aggregate Subscription Amount Preferred Shares Purchased at First Closing: 246.711 Warrants Purchased at First Closing: 9,868 Preferred Shares Purchased at Second Closing: 253.289 Warrants Purchased at Second Closing: 10,132 [SIGNATURES CONTINUED ONTO NEXT PAGE] PURCHASERS CONTINUED: RGC INTERNATIONAL INVESTORS, LDC BY: Rose Glen Capital Management, LP/RGC General Partner Corporation By:________________________________ Gary S. Kaminsky Managing Director DATE: Aggregate Subscription Amount Preferred Shares Purchased at First Closing: 1,973.684 Warrants Purchased at First Closing: 78,947 Preferred Shares Purchased at Second Closing: 2,026.316 Warrants Purchased at Second Closing: 81,053 [SIGNATURES CONTINUED ONTO NEXT PAGE] PURCHASERS CONTINUED: SHEPHERD INVESTMENTS INTERNATIONAL, LTD. By:________________________________ Name: Managing Member, Staro Asset Management, LLC Investment Manager, Shepherd Investments International, Ltd. DATE: Aggregate Subscription Amount Preferred Shares Purchased at First Closing: 1,726.974 Warrants Purchased at First Closing: 69,079 Preferred Shares Purchased at Second Closing: 1,773.026 Warrants Purchased at Second Closing: 70,921 STARK INTERNATIONAL By:________________________________ Name: Managing Member, Staro Asset Management, LLC Investment Manager, Stark International DATE: Aggregate Subscription Amount Preferred Shares Purchased at First Closing: 1,726.974 Warrants Purchased at First Closing: 69,079 Preferred Shares Purchased at Second Closing: 1,773.026 Warrants Purchased at Second Closing: 70,921 [SIGNATURES CONTINUED ONTO NEXT PAGE] PURCHASERS CONTINUED: SOCIETE GENERALE By:____________________________ Name: Title: DATE: Aggregate Subscription Amount Preferred Shares Purchased at First Closing: 2,467.105 Warrants Purchased at First Closing: 98,684 Preferred Shares Purchased at Second Closing: 2,532.895 Warrants Purchased at Second Closing: 101,316 [SIGNATURES CONTINUED ONTO NEXT PAGE] PURCHASERS CONTINUED: ELARA LTD. By:______________________________ Geoffrey Tirman, Talisman Capital President, Elara Ltd. DATE: Aggregate Subscription Amount Preferred Shares Purchased at First Closing: 493.421 Warrants Purchased at First Closing: 19,737 Preferred Shares Purchased at Second Closing: 506.579 Warrants Purchased at Second Closing: 20,263 [SIGNATURES CONTINUED ONTO NEXT PAGE] PURCHASERS CONTINUED: KEYWAY INVESTMENTS By:_____________________________ Gregory W. Murphy Title: DATE: Aggregate Subscription Amount Preferred Shares Purchased at First Closing: 493.421 Warrants Purchased at First Closing: 19,737 Preferred Shares Purchased at Second Closing: 506.579 Warrants Purchased at Second Closing: 20,263 Exhibit 99.2 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated as of December 4, 1997 (the "Agreement"), is made by and between BASE TEN SYSTEMS, INC., a New Jersey corporation (the "Company"), and the Investors set forth on the signature pages hereto (the "Initial Investors"). WITNESSETH: WHEREAS, in connection with the Securities Purchase Agreement dated December 4, 1997 between the Initial Investors and the Company (the "Purchase Agreement"), the Company has agreed, upon the terms and subject to the conditions of said Purchase Agreement, to issue and sell to the Initial Investors (the "Offering") Nineteen Million U.S. Dollars face amount of the Company's Convertible Preferred Shares (the "Preferred Shares"), convertible into shares of the Company's Class A Common Shares, par value $1.00 per share (the "Common Stock"), together with Stock Purchase Warrants (the "Warrants") to purchase additional shares of Common Stock. The shares of common stock of the Company into which the Preferred Shares are convertible and the Warrants are exercisable for are collectively referred to herein as the "Common Shares." WHEREAS, to induce the Initial Investors to execute and deliver the Purchase Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the "Securities Act"), and applicable state securities laws with respect to the Common Shares; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Initial Investors hereby agree as follows: 1. Definitions. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings: (a) "Holders" are stockholders of the Company who, by virtue of agreements with the Company, are entitled to include their securities in certain Registration Statements filed by the Company. (b) "Investors" means the Initial Investors and any transferee or assignee of the Initial Investors who agrees to become bound by the provisions of this Agreement in accordance with Section 9 hereof. (c) "Registrable Securities" means the Common Shares, together with any shares of Common Stock which may be issued as a dividend or other distribution and any additional shares of Common Stock which may be issued due to anti-dilution adjustments with respect to the Preferred Shares or Common Shares, which are required to be included in a Registration Statement pursuant to Section 2(a) below. (d) "Registration Period" means the period between the date of this Agreement and the earlier of (i) the date on which all of the Registrable Securities have been sold, or (ii) the date on which the Registrable Securities (in the opinion of Investors' counsel) may be immediately sold without registration pursuant to Rule 144(k) under the Securities Act. (e) "Registration Statement" means a registration statement filed with the Securities and Exchange Commission (the "SEC") under the Securities Act and any subsequent Registration Statement filed to register additional Registrable Securities. (d) The terms "register", "registered", and "registration" refer to a registration effected by preparing and filing a Registration Statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of effectiveness of such Registration Statement by the SEC. 2. Registration. (a) Mandatory Registration. The Company will file a Registration Statement on Form S-3 with the SEC registering the Registrable Securities in respect of the First Closing and the Second Closing for resale within twenty-five (25) business days of the initial closing of the purchase of the Preferred Shares (the "Closing Date"). To the extent allowable under the Securities Act (including Rule 416), the Registration Statement shall include the Common Shares and such indeterminate number of additional shares of Common Stock as may become issuable upon conversion of the Preferred Shares and exercise of the Warrants (i) to prevent dilution resulting from stock splits, stock dividends or similar transactions, or (ii) by reason of changes in the conversion price of the Preferred Shares or the exercise price of the Warrants in accordance with the terms thereof. The number of shares of Common Stock initially included in such Registration Statement shall be no less than 4,250,000 Common Shares. The Registration Statement (and each amendment or supplement thereto) shall be provided to, and subject to the approval of, the Initial Investors and their counsel, such approval not to be unreasonably withheld or delayed. The Company shall use its best efforts to cause such Registration Statement to be declared effective by the SEC no earlier than February 25, 1998 and no later than March 2, 1998 (the "Required Effective Date"). Such best efforts shall include, but not be limited to, promptly responding to all comments received from the staff of the SEC. The Initial Investors shall use reasonable efforts to cause their counsel to provide any comments or approve of any amendment to the Registration Statement within two business days of receipt. Once declared effective by the SEC, the Company shall cause such Registration Statement to remain effective throughout the Registration Period, and any amendment of such Registration Statement necessary to reflect the Second Closing shall not relieve the Company of its obligation to cause the Registration Statement to remain effective under this Agreement. (b) Late Registration Payments. If the Registration Statement required pursuant to Section 2(a) above has not been declared effective by the Required Effective Date the Company will make cash payments to the Investors as partial compensation for such delay (the "Late Registration Payments"). The Late Registration Payments will be equal to one and one-half percent (1.5%) of the purchase price paid for the Preferred Shares for each month following the Required Effective Date, continuing through the date the Registration Statement is declared effective by the SEC. The Late Registration Payments will be prorated on a daily basis for partial months and will be paid to the Initial Investors in cash within five (5) business days following the earlier of: (i) the end of each month following the Required Effective Date, or (ii) the effective date of the Registration Statement. Nothing herein shall limit any Investor's right to pursue actual damages for the Company's failure to file a Registration Statement or to have it declared effective by the SEC on or prior to the Required Effective Date in accordance with the terms of this Agreement. (c) Piggyback Registrations. If, at any time prior to the expiration of the Registration Period, the Company decides to register any of its securities for its own account or for the account of others (excluding registrations relating to equity securities to be issued solely in connection with an acquisition of any entity or business or in connection with stock option or other employee benefit plans), the Company will promptly give the Investors written notice thereof, and will use its best efforts to include in such registration all or any part of the Registrable Securities so requested by such Investors (excluding any Registrable Securities previously included in a Registration Statement). Each Investor's request for registration must be given to the Company in writing within ten (10) days after receipt of the notice from the Company. If the registration for which the Company gives notice is a public offering involving an underwriting, the Company will so advise the Investors as part of the above-described written notice. In such event, if the managing underwriter(s) of the public offering impose a limitation on the number of shares of Common Stock which may be included in the Registration Statement because, in such underwriter(s)' judgment, such limitation would be necessary to effect an orderly public distribution, then the Company will be obligated to include only such limited portion, if any, of the Registrable Securities with respect to which such Investors have requested inclusion hereunder. Any exclusion of Registrable Securities shall be made pro-rata among all Holders of the Company's securities seeking to include shares of Common Stock (including, for purposes of this Section 2(c) holders of securities of the Company other than the Registrable Securities who hold and are attempting to exercise registration rights) in proportion to the number of shares of Common Stock sought to be included by such Holders; provided, however, that the Company will not exclude any Registrable Securities unless the Company has first excluded all outstanding securities the Holders of which are not entitled by right to inclusion of securities in such Registration Statement. No right to registration of Registrable Securities under this Section 2(c) shall be construed to limit in any way the registration required under Section 2(a) above. The obligations of the Company under this Section 2(c) will expire upon the earlier of: (i) after the Company has afforded the opportunity for the Investors to exercise registration rights under this Section 2(c) for two registrations; provided, however, that any Investor who shall have had any Registrable Securities excluded from any Registration Statement in accordance with this Section 2(c) shall be entitled to include in any additional Registration Statement filed by the Company the Registrable Securities so excluded; or (ii) when all of the Registrable Securities held by any Investor may be sold by such Investor under Rule 144(k) under the 1933 Act without being subject to any volume restrictions. (d) Underwriter's Lock-Up. The underwriters in connection with any firm commitment public offering of the Company's common stock resulting in proceeds of at least $10,000,000 to the Company shall have the right to require that the Investors enter into an agreement restricting the Investors from selling Common Shares held by such Investors in any public sale for a period not to exceed 90 days following the closing of such underwriting, if they deem this to be reasonably necessary to effect such underwritten public offering; provided that all executive officers, directors and persons holding 5% or more of the Company's common equity securities shall have also agreed to identical (or more restrictive) restrictions. The Investors shall be subject to no more than two such restrictions during each 18 month period, and the aggregate number of days in all such restrictions during any 18 month period shall not exceed 90 days. (e) Eligibility for Form S-3. The Company represents and warrants that it meets the requirements for the use of Form S-3 for registration of the sale by the Initial Investors of the Registrable Securities, and the Company shall file all reports required to be filed by the Company with the SEC in a timely manner so as to maintain such eligibility for the use of Form S-3. 3. Additional Obligations of the Company. In connection with the registration of the Registrable Securities, the Company shall have the following additional obligations: (a) The Company shall keep each Registration Statement required by Section 2(a) hereof effective pursuant to Rule 415 under the Securities Act at all times during the Registration Period as defined in Section 1(d) above. (b) The Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) filed by the Company shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to keep the Registration Statement effective at all times during the Registration Period, and, during such period, shall comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the sellers thereof as set forth in the Registration Statement. In the event the number of shares of Common Stock included in a Registration Statement filed pursuant to this Agreement (excluding piggyback registrations as provided for in Section 2(c) above) is insufficient to cover all of the Registrable Securities, the Company shall amend the Registration Statement and/or file a new Registration Statement so as to cover all of the Registrable Securities as soon as practicable, but in no event more than twenty (20) business days after the Company first determines (or reasonably should have determined) the need therefor. The Company shall use its best efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof. The Late Registration Payment provisions of Section 2(b) above shall become applicable with respect to the effectiveness of such amendment and/or new Registration Statement on the sixtieth (60th) day following the date the Company first determines (or reasonably should have determined) the need for the amendment and/or new Registration Statement. (c) The Company shall furnish to each Investor whose Registrable Securities are included in the Registration Statement (i) promptly after the same is prepared and publicly distributed, filed with the SEC or received by the Company, one copy of the Registration Statement and any amendment thereto; each preliminary prospectus and final prospectus and each amendment or supplement thereto; and, in the case of the Registration Statement required under Section 2(a) above, each letter written by or on behalf of the Company to the SEC and each item of correspondence from the SEC, in each case relating to such Registration Statement (other than any portion of any item thereof which contains information for which the Company has sought confidential treatment); and (ii) such number of copies of a prospectus, including a preliminary prospectus, and all amendments and supplements thereto, and such other documents as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor. (d) The Company shall use its best efforts to (i) register and qualify the Registrable Securities covered by the Registration Statement under such other securities or blue sky laws of such jurisdictions as the Investors reasonably request, (ii) prepare and file in those jurisdictions such amendments (including post-effective amendments) and supplements to such registrations as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions. Notwithstanding the foregoing provision, the Company shall not be required in connection therewith or as a condition thereto to (i) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (ii) subject itself to general taxation in any such jurisdiction, (iii) file a general consent to service of process in any such jurisdiction, (iv) provide any undertakings that cause more than nominal expense or burden to the Company, or (v) make any change in its charter or bylaws, which in each case the Board of Directors of the Company determines to be contrary to the best interests of the Company and its stockholders. (e) In the event Investors who hold a majority in interest of the Registrable Securities being offered in an offering select underwriters for such offering, the Company shall enter into and perform its obligations under an underwriting agreement in usual and customary form including, without limitation, customary indemnification and contribution obligations, with the managing underwriter of such offering. If the Registration Statement required pursuant to Section 2(a) is not then effective, the Company shall be responsible for payment of the reasonable attorney fees and costs incurred by one law firm selected by such Investors to represent their interests in the underwritten offering. (f) The Company shall notify each investor who holds Registrable Securities being sold pursuant to a Registration Statement of the happening of any event of which the Company has knowledge as a result of which (i) the prospectus included in the Registration Statement as then in effect includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or (ii) sales cannot be made pursuant to such Registration Statement in compliance with the securities laws for any other reason (a "Suspension Event"). The Company shall make such notification as promptly as practicable after the Company becomes aware of such Suspension Event, shall promptly use its best efforts to prepare a supplement or amendment to the Registration Statement to correct such untrue statement or omission, and shall deliver a number of copies of such supplement or amendment to each Investor as such Investor may reasonably request. If an Investor reasonably believes that a Suspension Event is in effect, but has not received notice thereof from the Company, such Investor may deliver a written request, setting forth in reasonable detail the basis and source (including any individual) for such belief, that the Company confirm that no Suspension Event is in effect. The Company shall respond to any such request with a letter executed by an executive officer of the Company stating that, in consultation with its counsel, the Company has determined that a Suspension Event is or is not in effect, on or before the third business day following receipt of such request. If the Company fails to respond within such time period, a Suspension Event shall be deemed to be in effect commencing retroactively as of the day that the Investor delivered its request to the Company, and shall continue until the Investor is otherwise notified by the Company. Notwithstanding the foregoing provision, the Company shall not be required to maintain the effectiveness of the Registration Statement or to amend or supplement the Registration Statement for a period (a "Delay Period") beginning on the date of occurrence of the Suspension Event and expiring upon the earlier to occur of (i) the date on which such material information is disclosed to the public or ceases to be material, (ii) the date on which the Company is able to comply with its disclosure obligations and SEC requirements related thereto, or (iii) thirty (30) days after the occurrence of the Suspension Event; provided, however, that there shall not be more than two Delay Periods in any twelve (12) month period. In the event that the total number of days in any Delay Period(s) within a twelve-month period exceeds thirty (30) days, the Company shall extend the automatic conversion date of the Preferred Shares for a number of days equal to the total number of days in such Delay Period(s). In the event that the number of days in all Delay Period(s) taken together within a twelve-month period exceeds sixty (60) days, or in the event that there are more than two Delay Periods in any twelve-month period, regardless of the duration, the Company shall compensate the Investors for such delay by making monthly cash payments, prorated on a daily basis, to each such Investor of one and one-half percent (1.5%) of the purchase price paid for the Registrable Shares still held by such Investor at such time for each month, continuing through the date the Delay Period ceases (the "Delay Compensation"). The Delay Compensation will begin to accrue on the sixty-first (61st) day falling within one or more Suspension Events in any twelve-month period (or on the first day of any Delay Period in excess of the first two Delay Periods) and will be payable thirty days from that date and each thirty days thereafter until the Registration Statement is brought effective. (g) The Company shall use its best efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement and, if such an order is issued, shall use its best efforts to obtain the withdrawal of such order at the earliest possible time and to notify each Investor who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance of such order and the resolution thereof. (h) The Company shall permit counsel designated by the Investors who hold Registrable Securities being sold pursuant to such registration to review the Registration Statement and all amendments and supplements thereto (as well as all requests for acceleration or effectiveness thereof) a reasonable period of time prior to their filing with the SEC, and shall not file any document in a form to which such counsel reasonably objects. (i) The Company shall make generally available to its security Holders as soon as practical, but not later than ninety (90) days after the close of the period covered thereby, an earnings statement (in a form complying with the provisions of Rule 158 under the Securities Act) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter following the effective date of the Registration Statement. (j) At the request of any Investor who holds Registrable Securities being sold pursuant to such registration, the Company shall furnish on the date that Registrable Securities are delivered to an underwriter for sale in connection with the Registration Statement (i) a letter, dated such date, from the Company's independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the Investors; and (ii) an opinion, dated such date, from counsel representing the Company for purposes of such Registration Statement, in form and substance as is customarily given in an underwritten public offering, addressed to the underwriters and Investors. (k) The Company shall make available for inspection by any Investor whose Registrable Securities are being sold pursuant to such registration, any underwriter participating in any disposition pursuant to the Registration Statement, and any attorney, accountant or other agent retained by any such Investor or underwriter (collectively, the "Inspectors"), all pertinent financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably necessary to enable each Inspector to exercise its due diligence responsibility, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request for purposes of such due diligence; provided, however, that each Inspector shall hold in confidence and shall not make any disclosure (except to an Investor) of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement, (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court or government body of competent jurisdiction, or is reasonably necessary in connection with litigation or other legal process, or (iii) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other agreement. The Company shall not be required to disclose any confidential information in such Records to any Inspector until and unless such Inspector shall have entered into confidentiality agreements (in form and substance satisfactory to the Company) with the Company with respect thereto, substantially in the form of this Section 3(k). Each Investor agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at the Company's expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. Nothing herein shall be deemed to limit any Investor's ability to sell Registrable Securities in a manner which is otherwise consistent with applicable laws and regulations. (l) The Company shall hold in confidence and shall not make any disclosure of information concerning an Investor provided to the Company pursuant hereto unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other order from a court or governmental body of competent jurisdiction, or is reasonably necessary in connection with litigation or other legal process, or (iv) such information has been made generally available to the public other than by disclosure in violation of this or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning an Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to such Investor and allow such Investor, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information. (m) The Company shall use its best efforts either to (i) cause all the Registrable Securities covered by the Registration Statement to be listed on Nasdaq (as defined below), the AMEX or the NYSE and on each additional national securities exchange on which similar securities issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange, or (ii) secure designation of all the Registrable Securities covered by the Registration Statement as a National Association of Securities Dealers Automated Quotations System ("Nasdaq") "national market system security" within the meaning of Rule 11Aa2-1 of the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the quotation of the Registrable Securities on the Nasdaq National Market System or, if, despite the Company's best efforts to satisfy the preceding clause (i) or (ii), the Company is unsuccessful in satisfying the preceding clause (i) or (ii), to secure listing on a national securities exchange or Nasdaq authorization and quotation for such Registrable Securities and, without limiting the generality of the foregoing, to arrange for at least two market makers to register with the National Association of Securities Dealers, Inc. ("NASD") as such with respect to such Registrable Securities. (n) The Company shall provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the Closing Date. (o) The Company shall cooperate with the Investors who hold Registrable Securities being sold and the managing underwriter or underwriters, if any, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing Registrable Securities to be sold pursuant to the Registration Statement and enable certificates to be in such denominations or amounts as the case may be, and registered in such names as the managing underwriter or underwriters, if any, or the Investors may reasonably request; and, within five business days after a Registration Statement which includes Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel selected by the Company to deliver, to the transfer agent for the Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) instructions to the transfer agent to issue new stock certificates without a legend and an opinion of such counsel that the Common Shares have been registered. (p) The Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Investor of the Registrable Securities pursuant to the Registration Statement. 4. Obligations of the Investors. In connection with the registration of the Registrable Securities, the Investors shall have the following obligations: (a) It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Agreement with respect to each Investor that such Investor shall furnish to the Company such information regarding itself, the number of Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required by the rules of the SEC to effect the registration of the Registrable Securities. At least ten (10) business days prior to the first anticipated filing date of the Registration Statement, the Company shall notify each Investor of the information the Company requires from each such Investor (the "Requested Information") if such Investor elects to have any of such Investor's Registrable Securities included in the Registration Statement. If within five (5) business days of such notice the Company has not received the Requested Information from an Investor (a "Non-Responsive Investor"), then the Company may file the Registration Statement without including Registrable Securities of such Non-Responsive Investor. (b) Each Investor, by such Investor's acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the Registration Statement hereunder, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from the Registration Statement. (c) In the event Investors holding a majority in interest of the Registrable Securities being registered determine to engage the services of an underwriter, each Investor agrees to enter into and perform such Investor's obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the managing underwriter of such offering and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from the Registration Statement. (d) Each Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(f) or 3(g), such Investor will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by the Company, such Investor shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Investor's possession of the prospectus covering such Registrable Securities current at the time of receipt of such notice. (e) No Investor may participate in any underwritten registration hereunder unless such Investor (i) agrees to sell such Investor's Registrable Securities on the basis provided in any underwriting arrangements approved by the Investors entitled hereunder to approve such arrangements, (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements, and (iii) agrees to pay its pro rata share of all underwriting discounts and commissions and other fees and expenses of investment bankers and any manager or managers of such underwriting and legal expenses of the underwriter applicable with respect to its Registrable Securities, in each case to the extent not payable by the Company pursuant to the terms of this Agreement. 5. Expenses of Registration. All reasonable expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, printers and accounting fees, the fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of one counsel selected by the Initial Investors pursuant to Section 3(e) hereof, shall be borne by the Company. 6. Indemnification. In the event any Registrable Securities are included in a Registration Statement under this Agreement: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Investor who holds such Registrable Securities, the directors, if any, of such Investor, the officers, if any, of such Investor, each person, if any, who controls any Investor within the meaning of the Securities Act or the Exchange Act, any underwriter (as defined in the Securities Act) for the Investors, the directors, if any, of such underwriter and the officers, if any, of such underwriter, and each person, if any, who controls any such underwriter within the meaning of the Securities Act or the Exchange Act (each, an "Indemnified Person"), against any losses, claims, damages, expenses or liabilities (joint or several) (collectively "Claims") to which any of them become subject under the Securities Act, the Exchange Act or otherwise, insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any of the following statements, omissions or violations in the Registration Statement, or any post-effective amendment thereof, or any prospectus included therein: (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any post-effective amendment thereof or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such Registration Statement, or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act or any state securities law or any rule or regulation (the matters in the foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject to the restrictions set forth in Section 6(c) with respect to the number of legal counsel, the Company shall reimburse the Investors and each such underwriter or controlling person, promptly as such expenses are incurred and are due and payable, for any legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (A) shall not apply to a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by any Indemnified Person or underwriter for such Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto, if such prospectus was timely made available by the Company pursuant to Section 3(c) hereof; (B) with respect to any preliminary prospectus shall not inure to the benefit of any such person from whom the person asserting any such Claim purchased the Registrable Securities that are the subject thereof (or to the benefit of any person controlling such person) if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected in the prospectus, as then amended or supplemented, if a prospectus was timely made available by the Company pursuant to Section 3(c) hereof; and (C) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Persons and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. (b) In connection with any Registration Statement in which an Investor is participating, each such Investor agrees to indemnify and hold harmless, to the same extent and in the same manner set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement, each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, any underwriter and any other stockholder selling securities pursuant to the Registration Statement or any of its directors or officers or any person who controls such stockholder or underwriter within the meaning of the Securities Act or the Exchange Act (collectively and together with an Indemnified Person, an "Indemnified Party"), against any Claim to which any of them may become subject, under the Securities Act, the Exchange Act or otherwise, insofar as such Claim arises out of or is based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Investor expressly for use in connection with such Registration Statement, and such Investor will promptly reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Investor, which consent shall not be unreasonably withheld; provided further, however, that the Investors shall be liable under this Section 6(b) for only that amount of a Claim as does not exceed the net proceeds to such Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected on a timely basis in the prospectus, as then amended or supplemented. (c) Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action (including any governmental action), such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof and this indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying parties; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and other party represented by such counsel in such proceeding. The Company shall pay for only one separate legal counsel for the Investors; such legal counsel shall be selected by the Investors holding a majority in interest of the Registrable Securities. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as such expense, loss, damage or liability is incurred and is due and payable. 7. Contribution. To the extent any indemnification provided for herein is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that (i) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 6, (ii) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of such fraudulent misrepresentation, and (iii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. 8. Reports under the Exchange Act, with a view to making available to the Investors the benefits of Rule 144 promulgated under the Securities Act or any other similar rule or regulation of the SEC that may at any time permit the Investors to sell securities of the Company to the public without registration ("Rule 144"), the Company agrees to: (a) File with the SEC in a timely manner and make and keep available all reports and other documents required of the Company under the Exchange Act so long as the Company remains subject to such requirements and the filing and availability of such reports and other documents is required for the applicable provisions of Rule 144; and (b) Furnish to each Investor so long as such Investor holds Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144 and the Exchange Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Investors to sell such securities pursuant to Rule 144 without registration. 9. Assignment of Registration Rights. The rights to have the Company register Registrable Securities pursuant to this Agreement shall be automatically assigned by the Investors to transferees or assignees of all or any portion of such securities only if (i) the Investor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (ii) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being transferred or assigned, (iii) following such transfer or assignment the further disposition of such securities by the transferee or assignee is restricted under the Securities Act and applicable state securities laws, (iv) at or before the time the Company received the written notice contemplated by clause (ii) of this sentence, the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein, (v) such transfer shall have been made in accordance with the applicable requirements of the Purchase Agreement, and (vi) such transferee shall be an "accredited investor" as that term is defined in Rule 501 of Regulation D promulgated under the Securities Act. 10. Amendment of Registration Rights. Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and Investors who hold a majority interest of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each Investor and the Company. 11. Third Party Beneficiary. The parties acknowledge and agree that Shoreline Pacific Institutional Finance, the Institutional Division of Financial West Group ("Shoreline"), shall be deemed a third party beneficiary of the Company's agreements and representations set forth in this Agreement, entitled to enforce the terms thereof, and to indemnification for any damages resulting to Shoreline from any actual or threatened breach thereof by the Company, both in Shoreline's personal capacity and, should Shoreline so elect, and provided that Shoreline has obtained the prior written consent of the Investor, on behalf of the Investor. 12. Miscellaneous. (a) Conflicting Instructions. A person or entity is deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. (b) Notices. Any notices required or permitted to be given under the terms of this Agreement shall be sent by certified or registered mail (with return receipt requested) or delivered personally or by courier (including a nationally recognized overnight delivery service) or by facsimile transmission. Any notice so given shall be deemed effective three days after being deposited in the U.S. Mail, or upon receipt if delivered personally or by courier or facsimile transmission, in each case addressed to a party at the following address or such other address as each such party furnishes to the other in accordance with this Section 12(b): If to the Company: Base Ten Systems, Inc. One Electronics Drive Trenton, NJ 08619 Telephone: (609) 586-7010 Telecopy: (609) 586-1593 Attention: Mr. Alexander M. Adelson with a copy to: Battle, Fowler LLP Park Avenue Tower 75 East 55th Street New York, NY 10022 Telephone: (212) 856-7000 Telecopy: (212) 856-7822 Attention: David Warburg, Esq. If to JMG Capital Partners, L.P. JMG Capital Partners, L.P. 1999 Avenue of the Stars, Suite 1950 Los Angeles, CA 90067 Telephone: (310) 201-2619 Telecopy: (310) 201-2759 Attention: Mr. Jonathan Glaser If to Triton Capital Investments, Ltd.: Triton Capital Investments, Ltd. c/o JMG Capital Partners, L.P. 1999 Avenue of the Stars, Suite 1950 Los Angeles, CA 90067 Telephone: (310) 201-2619 Telecopy: (310) 201-2759 Attention: Mr. Jonathan Glaser If to RGC International Investors, LDC: RGC International Investors, LDC c/o Rose Glen Capital Management, L.P. RGC General Partner Corp 3 Bala Plaza East, Suite 200 251 St. Asaphs Road Bala Cynwyd, PA 19004 Telephone: (610) 617-5900 Telecopy: (610) 617-0570 Attention: Mr. Gary S. Kaminsky and with a copy to: Ballard, Spahr, Andrew Ingersoll 1735 Market Street, 51st Floor Philadelphia, PA 19103-7599 Telephone: (215) 864-8123 Telecopy: (215) 864-8999 Attention: Mr. Keith S. Marlowe, Esq. If to Shepherd Investments International, Ltd.: Shepherd Investments International, Ltd. c/o Staro Asset Management 1500 West Market Street, Suite 200 Mequon, WI 53092 Telephone: (414) 241-1810 Telecopy: (414) 241-7704 Attention: Mr. Joe Lucas and with a copy to: Schulte Roth & Zabel LLP 900 Third Avenue New York, NY 10022 Telephone: (212) 756-2376 Telecopy: (212) 593-5955 Attention: Mr. Eleazer Klein, Esq. If to Stark International: Stark International c/o Staro Asset Management 1500 West Market Street, Suite 200 Mequon, WI 53092 Telephone: (414) 241-1810 Telecopy: (414) 241-7704 Attention: Mr. Joe Lucas and with a copy to: Schulte Roth & Zabel LLP 900 Third Avenue New York, NY 10022 Telephone: (212) 756-2376 Telecopy: (212) 593-5955 Attention: Mr. Eleazer Klein, Esq. If to Societe Generale: Societe Generale 1221 Avenue of the Americas 6th Floor New York, NY 10020 Telephone: (212) 278-5260 Telecopy: (212) 278-5467 Attention: Mr. Guillaume Pollet with a copy to: Dorsey & Whitney LLP 250 Park Avenue New York, NY 10177 Telephone: (212) 415-9263 Telecopy: (212) 888-0018 Attention: Mr. Eric Maki, Esq. If to Elara Ltd.: Elara Ltd. c/o Talisman Capital PO Box 438 Tropic Isle Building Wickhams Cay Road Town, Tortolla British Virgin Islands Telephone: (809) 494-2616 Telecopy: (809) 494-2794 Attention: Geoffrey Tirman If to Keyway Investments: Keyway Investments c/o Midland Walwyn Capital, Inc. BCE Place-181 Bay Street, Suite 500 Toronto, Ontario M5J2V8 Canada Telephone: (416) 369-8738 Telecopy: (416) 369-8726 Attention: Mr. Gregory W. Murphy If to Midland Walwyn Capital, Inc.: Midland Walwyn Capital, Inc. with a copy to: Kauhnan Malchman Kirby & Squier 919 3rd Avenue, 11th Floor New York, NY 10022 Telephone: (212) 371-6600 Telecopy: (212) 751-2540 Attention: Mr. Rick Stone, Esq. in each case with a copy to: Shoreline Pacific Institutional Finance 3 Harbor Drive, Suite 211 Sausalito, CA 94965 Telephone: (415) 332-7800 Telecopy: (415) 332-7808 Attention: General Counsel and: Cowen & Co. 1 Financial Square New York, NY 10005 Telephone: (212) 495-3950 Telecopy: (212) 495-8305 Attention: Mr. Bill Smith (c) Waiver. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. (d) Governing Law: Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the Company's jurisdiction of incorporation (in respect of matters of corporation law) and the laws of the State of New York (in respect of all other matters) applicable to contracts made and to be performed in the State of New York. The parties hereto irrevocably consent to the jurisdiction of the United States federal courts and state courts located in the Borough of Manhattan in the State of New York in any suit or proceeding based on or arising under this Agreement or the transactions contemplated hereby and irrevocably agree that all claims in respect of such suit or proceeding may be determined in such courts. The Company and each Investor irrevocably waives the defense of an inconvenient forum to the maintenance of such suit or proceeding in such forum. The Company and each Investor further agrees that service of process upon the Company or such Investor, as applicable, mailed by the first class mail in accordance with Section 12(b) shall be deemed in every respect effective service of process upon the Company or such Investor in any suit or proceeding arising hereunder. Nothing herein shall affect any Investor's right to serve process in any other manner permitted by law. The parties hereto agree that a final non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. The parties hereto irrevocably waive any right to trial by jury under applicable law. (e) Severability. In the event that any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof. (f) Entire Agreement. This Agreement and the Purchase Agreement (including all schedules and exhibits thereto) constitute the entire agreement among the parties hereto with respect to the subject matter hereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. (g) Successors and Assigns. Subject to the requirements of Section 9 hereof, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. (h) Use of Pronouns. All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. (i) Headings. The headings and subheadings in the Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (j) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission, and facsimile signatures shall be binding on the parties hereto. (k) Further Acts. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. (1) Remedies. No provision of this Agreement providing for any remedy to any party shall limit any remedy which would otherwise be available to such Investor at law or in equity. Nothing in this Agreement shall limit any rights an Investor may have with any applicable federal or state securities laws with respect to the investment contemplated hereby. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to an Investor. Accordingly, the Company and the Investors acknowledge that the remedy at law for a breach of their respective obligations under this Agreement will be inadequate and that, in the event of a breach or threatened breach by the Company or the Investors, respectively, of the provisions of this Agreement, that an Investors or Company, respectively, shall be entitled, in addition to all other available remedies, to an injunction restraining any breach and requiring immediate compliance, without the necessity of showing economic loss and without any bond or other security being required. (m) Consents. All consents and other determinations to be made by the Investors pursuant to this Agreement shall be made by Investors holding a majority of the Registrable Securities, determined as if all shares of preferred stock of the Company issued in the Offering and all Warrants then outstanding had been converted into or exercised for Registrable Securities. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first above written. COMPANY: BASE TEN SYSTEMS, INC. By:___________________________ Name: Title: [SIGNATURES CONTINUED ONTO NEXT PAGE] PURCHASERS: JMG CAPITAL PARTNERS, L.P. By:__________________________ Jonathan Glaser President, JMG Capital Management, Inc. General Partner, JMG Capital Partners, LP DATE: TRITON CAPITAL INVESTMENTS, LTD By:_____________________________ Jonathan Glaser Vice President, Triton Capital Investments, Ltd. DATE: [SIGNATURES CONTINUED ONTO NEXT PAGE] PURCHASERS CONTINUED RGC INTERNATIONAL INVESTORS, LDC BY: Rose Glen Capital Management, LP RGC General Partner Corporation By:______________________________ Gary S. Kaminsky Managing Director DATE: [SIGNATURES CONTINUED ONTO NEXT PAGE] PURCHASERS CONTINUED SHEPHERD INVESTMENTS INTERNATIONAL, LTD. By:__________________________ Name: Managing Member, Staro Asset Management, LLC Investment Manager, Shepherd Investments International, Ltd. DATE: STARK INTERNATIONAL By:_____________________________ Name: Managing Member, Staro Asset Management, LLC Investment Manager, Stark International DATE: [SIGNATURES CONTINUED ONTO NEXT PAGE] PURCHASERS CONTINUED SOCIETE GENERALE By:_______________________ Name: Title: DATE: [SIGNATURES CONTINUED ONTO NEXT PAGE] PURCHASERS CONTINUED: ELARA LTD. By:__________________________ Geoffrey Tirman, Talisman Capital President, Elara Ltd. DATE: [SIGNATURES CONTINUED ONTO NEXT PAGE] PURCHASERS CONTINUED: KEYWAY INVESTMENTS By:___________________________ Gregory W. Murphy Title: DATE: Exhibit 99.3 BASE TEN SYSTEMS, INC. CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION PROVIDING FOR DESIGNATION, PREFERENCES AND RIGHTS OF THE CONVERTIBLE PREFERRED SHARES, SERIES A (Par Value $ 1.00 Per Share) of BASE TEN SYSTEMS, INC. Base Ten Systems, Inc., a corporation (the "Corporation") organized under the laws of the State of New Jersey, to amend its Restated Certificate of Incorporation in accordance with Chapter 9 of the New Jersey Business Corporation Act, hereby certifies: FIRST: The name of the Corporation is Base Ten Systems, Inc. SECOND: The Board of Directors of the Corporation, at a meeting held on December 2, 1997, pursuant to Section 14A:7-2 of the New Jersey Business Corporation Act and the authority vested in the Board of Directors by the Restated Certificate of Incorporation, as amended, adopted the following resolution providing for the issuance of a new series of the Corporation's Preferred Shares, par value $1.00 per share, consisting of up to 19,000 shares of Convertible Preferred Shares, Series A: RESOLVED, that pursuant to the authority vested in this Board of Directors in accordance with the provisions of the Corporation's certificate of incorporation, as amended, a new series of Preferred Shares of the Corporation known as Convertible Preferred Shares, Series A, be, and hereby is, created, classified, authorized and the issuance thereof provided for, and that the designation and number of shares, and relative rights, preferences and limitations thereof are hereby fixed, and Article 6 of the Certificate of Incorporation of the Corporation, as amended, is hereby amended by adding Article 6(d) thereto, to read, in its entirety, as follows: (d) A. Designation and Amount. The shares of the new series of Preferred Shares shall be designated as "Convertible Preferred Shares, Series A" and the number of shares constituting such series shall initially be 19,000, with a par value of $1.00 per share. Fractional Preferred Shares shall be permitted. The relative rights, preferences, restrictions and other matters relating to the Preferred Shares are contained in this Certificate of Amendment. The number of Preferred Shares may be increased, subject to and in accordance with the New Jersey Business Corporation Act, without approval of the existing holders of Preferred Shares, solely for the purpose of issuance pursuant to Section C(l) hereof. B. Definitions. As used in this Certificate of Amendment, the following terms shall have the following meanings: "Board of Directors" means the board of directors of the Corporation. "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions in the City of New York, New York are authorized or obligated by law or executive order to close. "Capital Stock" means any and all shares, rights to purchase, warrants, options, convertible securities, participation or other equivalents of or interests (other than security interests) in (however designated and whether voting or nonvoting) corporate stock. "Certificate of Amendment" means this Certificate of Amendment, establishing the Preferred Shares pursuant to Chapter 9 of the New Jersey Business Corporation Act, as the same may be amended, supplemented or modified from time to time in accordance with the terms hereof and pursuant to applicable law. "Conversion Default Payments" has the meaning set forth in Section H(2) hereof. "Closing Bid Price" means, for any security as of any date, the closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded, as reported at the close of normal trading hours, New York time, by Bloomberg Financial Markets or a comparable reporting service of national reputation selected by the Corporation and reasonably acceptable to holders of the Preferred Shares then holding a majority of the then outstanding Preferred Shares ("Majority Holders") if Bloomberg Financial Markets is not then reporting closing bid prices of such security (collectively, "Bloomberg"), or if the foregoing does not apply, the last reported sale price of such security in the over-the-counter market on the electronic bulletin board of such security as reported by Bloomberg, or, if no sale price is reported for such security by Bloomberg, the average of the bid prices of any market makers for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on such date on any of the foregoing bases, the Closing Bid Price of such security on such date shall be the fair market value as reasonably determined by an investment banking firm selected by the Corporation and reasonably acceptable to the Majority Holders, with the costs of such appraisal to be borne by the Corporation. "Closing Date" means the date on which Preferred Shares are initially issued. "Common Shares" means the Class A Common Shares, par value $1.00 per share, of the Corporation and all shares hereafter authorized of any class of Common Shares of the Corporation, and, in the case of a reclassification, recapitalization or other similar change in such Common Shares or in the case of a consolidation or merger of the Corporation with or into another Person, such consideration to which a holder of a share of Common Shares would have been entitled upon the occurrence of such event. Common Shares shall not include the Corporation's Class B Common Shares, par value $1.00 per share. "Conversion Date" has the meaning set forth in Section H(2) hereof. "Conversion Notice" has the meaning set forth in Section H(2) hereof. "Conversion Price" has the meaning set forth in Section H(l) hereof. "Default Redemption Amount" has the meaning set forth in Section F(4) hereof. "Default Redemption Notice" has the meaning set forth in Section F(4) hereof. "Delay Compensation" has the meaning set forth in Section 3(f) of the Registration Rights Agreement. "Delisting Payments" has the meaning set forth in Section 4.5 of the Securities Purchase Agreement. "Dividend Payment Date" has the meaning set forth in Section C(l) hereof. "DTC" has the meaning set forth in Section H(11) hereof. "Fiscal Quarter" means a calendar quarter ended on March 31, June 30, September 30 or December 31, as the case may be. "Five Percent Limitation" has the meaning set forth in Section H(l) hereof. "Illiquidity Payment" has the meaning set forth in Section C(l) hereof. "Initial Closing Cap Amount" has the meaning set forth in Section H(l) hereof. "Initial Conversion Price" means $12.50 (subject to adjustment pursuant to Section H(4) hereof). "Late Registration Payments" has the meaning set forth in Section 2(b) of the Registration Rights Agreement. "Junior Stock" means Common Shares and any other class or series of Capital Stock of the Corporation now or hereafter issued and outstanding that ranks junior as to dividends and/or liquidation to the Preferred Shares. "Mandatory Redemption Price'; has the meaning set forth in Section F(2) hereof. "Market Value" as of any date means the average Closing Bid Price of Common Shares for the ten consecutive Trading Days ending on the date prior to such date. "Maturity Date" means the third anniversary date of the Closing Date, provided, however, that such original Maturity Date shall be extended by a number of Trading Days equal to the aggregate number of Trading Days during the period from March 1, 1998 to and including the original Maturity Date during which the holders of Preferred Stock are restricted from selling Common Shares by reason of (x) Section 2(d) of the Registration Rights Agreement, (y) any Delay Period(s) (as defined in Section 3(f) of the Registration Rights Agreement), but only if the total number of days in any Delay Period(s) within a twelve-month period exceed thirty (30) days, or (z) any Redemption Event. "NASDAQ" means the National Association of Securities Dealers Automated Quotation System. "Permanent Cap Amount" has the meaning set forth in Section H hereof. "Person" means an individual, a corporation, a partnership, a joint venture, an association, a joint-stock company, a trust, a business trust, a government or any agency or any political subdivision, any unincorporated organization, or any other entity. "Preferred Shares" means the Convertible Preferred Shares, Series A. "Purchase Price" shall mean $1,000 per Preferred Share. "Redemption Date" means any date on which shares of Preferred Shares are to be redeemed pursuant to Section F hereof. "Redemption Event" means any one of the following: (i) the Common Shares (including any of the Common Shares issuable upon conversion of the Preferred Shares or required from time to time to be reserved pursuant to this Certificate of Amendment) are suspended from trading on, or are not listed (and authorized) for trading on, the NASDAQ Small Cap Market, the NASDAQ National Market System, the American Stock Exchange, or the New York Stock Exchange for an aggregate of thirty (30) Trading Days in any eighteen (18) month period; (ii) the Company fails: (x) to cause the registration statement required pursuant to Section 2(a) of the Registration Rights Agreement to be declared effective on or before the one hundred eightieth (180th) day following Closing in a manner which would allow the sale of all Registrable Securities (as defined in the Registration Rights Agreement) to the fullest extent permitted under Section 2(a) of the Registration Rights Agreement; or (y) to cause the holders of Preferred Shares to be able to utilize such registration statement for the resale of all of their Registrable Securities (as defined in the Registration Rights Agreement), unless the Company is using its best efforts to remedy such inability to utilize such registration statement, subject to the Company's Board of Directors having determined in their good faith business judgment by resolution that the continued effectiveness of such registration statement would have a material adverse effect on the Company's ability to consummate a financing, acquisition, merger or joint venture, the failure of which to consummate would have a material adverse effect on the Company's financial condition, results of operations or future prospects; provided that in no event shall such failure described in this clause (y) exist for a total of more than thirty (30) Trading Days in any eighteen (18) month period; (iii) The Company fails to (x) issue Common Shares to a holder of the Preferred Shares upon exercise by the holder of its conversion rights in accordance with the terms of this Certificate of Amendment; (y) transfer or to cause its transfer agent to transfer any certificate for Common Shares issued to a holder upon conversion of the Preferred Shares as and when required by this Certificate of Amendment or the Registration Rights Agreement; or (z) remove any restrictive legend on any certificate for any Common Shares issued to a holder of the Preferred Shares upon conversion of the Preferred Shares as and when required by this Certificate of Amendment, the Securities Purchase Agreement or the Registration Rights Agreement; and any such failure described above shall continue uncured for ten (10) Business Days; or (iv)The Corporation fails to pay to a holder of Preferred Shares any amounts due hereunder or pursuant to the Securities Purchase Agreement or Registration Rights Agreement (including but not limited to dividends and Illiquidity Payments, Conversion Default Payments, Late Registration Payments and Delay Compensation thereon) when due and any such failure shall continue uncured (after written notice and demand to cure from the holder of Preferred Shares) for ten (10) Business Days. "Redemption Price" means the Optional Redemption Price, the Mandatory Redemption Price or the Default Redemption Price, as the case may be, each of which terms shall have the respective meanings set forth in Section F hereof. "Registration Rights Agreement" means the Registration Rights Agreement dated as of the Closing Date between the Corporation and the initial purchasers of the Preferred Shares, a copy of which will be on file in the offices of the Corporation and available for inspection by shareholders of the Corporation. "Rule 4460 Amount" has the meaning set forth in Section H(l) hereof. "Second Closing" has the meaning set forth in Section 1.1 of the Securities Purchase Agreement. "Securities Purchase Agreement" means the Securities Purchase Agreement dated as of the Closing Date between the Corporation and the initial purchasers of the Preferred Shares, a copy of which will be on file in the offices of the Corporation and available for inspection by shareholders of the Corporation. "Shareholder Approval" has the meaning set forth in Section 4.8 of the Securities Purchase Agreement. "Trading Day" means, with respect to the Common Shares: (i) if any series of Common Shares is quoted on the NASDAQ National Market System, any similar system of automated dissemination of quotations of securities prices, or the National Quotation Bureau Incorporated, each day on which quotations may be made on such system; or (ii) if any series of Common Shares is listed or admitted for trading on any national securities exchange, days on which such national securities exchange is open for business; or (iii) if the Corporation's Common Shares are not quoted on any system or listed or admitted for trading on any securities exchange, a Business Day. "Underwriter's Lock-Up" has the meaning set forth in Section 2(d) of the Registration Rights Agreement. "Variable Conversion Price" means the Weighted Average Price of Common Shares for any two Trading Days selected by a holder in the twenty (20) consecutive Trading Day period ending on the day prior to the day a holder of Preferred Shares delivers a Conversion Notice or Default Redemption Notice (subject to equitable adjustment for events during such Trading Day period of the nature described in Section H(4)), provided, however, that a holder may not select the Trading Day on which the lowest Weighted Average Price of the Common Shares in the twenty (20) consecutive Trading Day period was reported. "Weighted Average Price" means for any security for any date or dates, the volume weighted average price of such security on the principal securities exchange or trading market where such security is listed or traded, as reported at the close of normal trading hours, New York time, by Bloomberg Financial Markets or a comparable reporting service of national reputation selected by the Corporation and reasonably acceptable to holders of the Preferred Shares then holding a majority of the then outstanding Preferred Shares ("Majority Holders") if Bloomberg Financial Markets is not then reporting volume weighted average prices of such security (collectively, "Bloomberg"), or if the foregoing does not apply, the last reported sale price of such security in the over-the-counter market on the electronic bulletin board of such security as reported by Bloomberg, or, if no sale price is reported for such security by Bloomberg, the average of the bid prices of any market makers for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the Weighted Average Price cannot be calculated for such security for such date or dates on any of the foregoing bases, the Weighted Average Price of such security for such date or dates shall be the fair market value as reasonably determined by an investment banking firm selected by the Corporation and reasonably acceptable to the Majority Holders, with the costs of such appraisal to be borne by the Corporation. C. Dividends and Certain Other Payments. The holders of the Preferred Shares shall be entitled to receive, when and as declared by the Board of Directors, out of funds legally available therefor, dividends and certain other payments as set forth in this Section C. (1) If (i) the Closing Bid Price of the Corporation's Common Shares is less than $8.00 per share (adjusted for events of the nature described in Section H(4)(i)) for ten (10) consecutive Trading Days during any Fiscal Quarter, the holders of the Preferred Shares shall be entitled to receive dividends at a rate of $20.00 per share for such entire Fiscal Quarter, or (ii) the number of Common Shares issued upon conversion of Preferred Shares by a holder equals, prior to the Second Closing, the Initial Closing Cap Amount with respect to that holder and, after the Second Closing, the Permanent Cap Amount with respect to that holder, or a holder of Preferred Shares is subject to an Underwriter's Lock-Up, that holder (but not any other holder) shall be entitled to receive a payment (an "Illiquidity Payment") at the rate of $20.00 per Preferred Share for each Fiscal Quarter in which such event occurs or is continuing. Dividends and Illiquidity Payments shall be payable at the option of the Board of Directors (x) in cash, or (y) provided Shareholder Approval has been obtained, and further provided that this Certificate of Amendment or the Corporation's Certificate of Incorporation shall have been appropriately amended, solely to the extent necessary to increase the number of Preferred Shares authorized so as to make sufficient Preferred Shares available for issuance pursuant to this Section C(l), in a number of Preferred Shares (which may include fractional Preferred Shares) equal to the product of (A) the cash amount of such quarterly dividend or Illiquidity Payment, as the case may be, multiplied by (B) 1.25, divided by (C) the Purchase Price per Preferred Share. (2) The holders of Preferred Shares shall be entitled to participate with the holders of Common Shares in any dividends paid or set aside for payment with respect to the Common Shares so that the holders of Preferred Shares shall receive with respect to each Preferred Share an amount equal to (x) the dividend payable with respect to each Common Share multiplied by (y) the number of Common Shares (and fraction of a Common Share, if any) into which such Preferred Share is convertible as of the record date for such dividend. (3) Dividends and Illiquidity Payments shall accrue (whether or not declared) from and including the first day of the relevant Fiscal Quarter to and including the date on which the Redemption Price is paid on such shares or on which such shares are converted or redeemed and, to the extent not paid for any relevant Fiscal Quarter, will be cumulative. Dividends and Illiquidity Payments on the Preferred Shares, to the extent payable, shall be payable quarterly, in arrears, on the last day of each relevant Fiscal Quarter (each such date, a "Dividend Payment Date"), except that if any such date is not a Business Day, then such dividend or Illiquidity Payment shall be paid on the next succeeding Business Day. Each such dividend or Illiquidity Payment shall be payable to holders of Preferred Shares at the close of business on the Dividend Payment Date. Dividends on the Preferred Shares shall accrue on a daily basis during the relevant quarterly period whether or not the Corporation shall have earnings or surplus at the time. D. Voting Rights. The holders of Preferred Shares shall have the following voting rights: (1) Each holder of Preferred Shares shall be entitled to such number of votes for the Preferred Shares held by him on all matters submitted to a vote of the Corporation's shareholders as shall be equal to the largest number of whole Common Shares into which all of his Preferred Shares are then convertible (after giving effect, and subject to, the Five Percent Limitation, the Permanent Cap Amount, and any other then applicable limitations set forth in Section (H)(1)); (2) Except as otherwise provided herein or by law, the holders of Preferred Shares and the holders of Common Shares shall vote together as one class on all matters submitted to a vote of the Corporation's shareholders. (3) So long as any Preferred Shares are outstanding, the Corporation shall not, without first obtaining the approval of the holders of two-thirds of the Preferred Shares: (i) alter or change the rights, preferences or privileges of the Preferred Shares; (ii) issue any other class or series of Capital Stock having rights upon liquidation or rights as to dividends which are senior to or pari passu with the rights of the holders of Preferred Shares; or (iii) issue any additional Preferred Shares in excess of the 19,000 Preferred Shares authorized hereunder, other than any additional Preferred Shares which may be issued pursuant to Section C(l) hereof. E. Liquidation Preference. In the event of any liquidation, dissolution, or winding up of the Corporation, either voluntary or involuntary, after the payment or the setting apart of payment to the holders of any class or series of Capital Stock of the Corporation hereafter issued and outstanding that ranks senior as to dividends and/or liquidation to the Preferred Shares, the holders of Preferred Shares shall be entitled to receive out of assets of the Corporation available for distribution to shareholders, an amount equal to the Mandatory Redemption Price of such shares, before any payment shall be made or any assets distributed to the holders of Junior Stock. If the assets and funds to be distributed to the holders of the Preferred Shares, and the holders of any other Capital Stock ranking pari passu with the Preferred Shares, shall be insufficient to permit the payment to all such holders of their full preferential amount, the assets and funds legally available shall be distributed ratably, among the holders of such other Capital Stock ranking pari passu with the Preferred Shares, in proportion to the full preferential amount each such holder is otherwise entitled to receive. Neither the consolidation or merger of the Corporation with or into any other entity nor the sale or transfer by the Corporation of all or substantially all of its assets shall, for the purposes hereof, be deemed to be a liquidation, dissolution or winding up of the Corporation. F. Redemption. (1) Optional Redemption by the Company. While a Registration Statement (as defined in the Registration Rights Agreement) is effective with respect to the Common Shares issuable on conversion of the Preferred Shares and so long as no Redemption Event has occurred and is continuing, the Corporation may, at its option at (i) any time within 45 days prior to or 15 days after the commencement of a firm commitment public offering of its equity securities, or (ii) at any time or from time to time after the first anniversary date of the Closing Date, redeem for cash, out of funds legally available therefor, all or any part of (but not less than 1,900 Preferred Shares in any single redemption) of the outstanding Preferred Shares at a price per Preferred Share equal to the greater of (x) 130% of the then applicable Mandatory Redemption Price per Preferred Share or (y) the sum of (A) the then applicable Mandatory Redemption Price per Preferred Share, plus (B) the difference between (I) the Market Value of the Common Shares into which each Preferred Share is convertible on the Redemption Date and (II) the Closing Bid Price of the Common Shares into which each Preferred Share is convertible on the Redemption Date (the "Optional Redemption Price"). (2) Mandatory Redemption by the Company. The Corporation shall redeem all outstanding Preferred Shares on the Maturity Date at a price per share equal to the sum of (x) the Purchase Price, (y) any accrued and unpaid dividends thereon through the date of final distribution to shareholders, whether or not declared, and any Illiquidity Payments and Conversion Default Payments thereon, and (z) any Late Registration Payments, Delay Compensation and Delisting Payments thereon (collectively, the "Mandatory Redemption Price"). All Conversion Default Payments, Late Registration Payments, Delay Compensation and Conversion Default Payments shall be payable on the Maturity Date in cash, out of funds legally available therefor. The balance of the Mandatory Redemption Price (the "Remaining Redemption Amount") shall be payable on the Maturity Date at the option of the Board of Directors (x) in cash, out of funds legally available therefor; or (y) while a Registration Statement (as defined in the Registration Rights Agreement) is effective with respect to the Common Shares issuable on redemption of the Preferred Shares, in Common Shares having an aggregate Market Value on the Maturity Date equal to (A) the Remaining Redemption Amount multiplied by (B) 1.25. (3) Procedures for Redemption by the Company. (i) At least 30 days (45 days if the Redemption Price is to be paid in Common Shares) but not more than 60 days before the applicable Redemption Date, the Corporation or its transfer agent shall mail a notice of redemption by first-class mail postage prepaid to each holder of Preferred Shares, addressed to such holders at their last addresses shown on the stock transfer books of the Corporation. Such notice shall indicate that Preferred Shares are to be redeemed and shall, among other things, state: (a) the Redemption Date; (b) the number of Preferred Shares being redeemed; (c) the Optional Redemption Price or Mandatory Redemption Price, as the case may be, including the amount of unpaid dividends, Illiquidity Payments, Conversion Default Payments, Late Registration Payments, Delay Compensation and Delisting Payments with respect to such shares; (d) that the Preferred Shares called for redemption must be surrendered to the Corporation to collect the Redemption Price; (e) that Preferred Shares called for redemption may be converted at any time before the close of business on the first Business Day preceding the Redemption Date. Failure to give notice or any defect in the notice to any holder shall not affect the validity of the notice given to any other holder. (ii) As long as the Corporation has complied with the requirements set forth in this Section F, from and after the applicable Redemption Date, dividends on, and Illiquidity Payments, Conversion Default Payments, Late Registration Payments, Delay Compensation and Delisting Payments with respect to the shares of Preferred Shares so called for redemption shall cease to accrue as of the applicable Redemption Date, such shares shall be canceled and shall no longer be deemed to be outstanding, and all rights of the holders thereof as shareholders of the Corporation (except the right to receive from the Corporation the Redemption Price) shall cease. (4) Optional Redemption By Holder. (i) Upon the occurrence of a Redemption Event, each holder of Preferred Shares shall have the right to elect at any time and from time to time by delivery of a Default Redemption Notice (as defined herein) to the Corporation while such Redemption Event continues, to require the Corporation to purchase for cash, out of funds legally available therefor, for an amount per share equal to the Default Redemption Amount (as defined herein), any or all of the then outstanding shares of Preferred Shares held by such Holder. The "Default Redemption Amount" with respect to each Preferred Share means an amount equal to the greater of (i) 1.25 times the then effective Mandatory Redemption Price per share of each Preferred Share for which a demand for redemption is being made or (ii) (x) the then effective Mandatory Redemption Price of each Preferred Share for which a demand for redemption is being made, divided by (y) the then effective Conversion Price, multiplied by (z) the Market Value of the Common Shares. (ii)If the Corporation fails to pay any holder the Default Redemption Amount with respect to any Preferred Shares within five (5) Business Days of its receipt of a notice requiring such redemption (a "Default Redemption Notice"), then the holder delivering such Default Redemption Notice shall be entitled to interest on the Default Redemption Amount at a per annum rate equal to the lower of (x) the sum of prime rate published from time to time by the Wall Street Journal plus five percent (5%) and (y) the highest interest rate permitted by applicable law from the date of the Default Redemption Notice until the date of redemption hereunder. In the event the Corporation is not able to redeem all of the shares of Preferred Shares subject to Default Redemption Notices because of insufficient shareholders equity, restrictions under applicable law or pursuant to agreements, or lack of cash, the Corporation shall redeem shares of Preferred Shares from each holder, to the maximum extent, pro rata, based on the total number of shares of Preferred Shares included by such holder in the Default Redemption Notice relative to the total number of shares of Preferred Shares in all of the Default Redemption Notices. G. Consolidation, Merger and Sale of Assets, etc. The Corporation shall not consolidate with or merge into, or transfer all or substantially all of its assets to, another Person unless (i) in the case of a merger or consolidation, the Corporation is the surviving entity and the rights and preferences of the Preferred Shares are not modified, or (ii) (A) the surviving, resulting or acquiring Person is a Person organized under the laws of the United States, any state thereof or the District of Columbia, or a Person organized under the laws of a foreign jurisdiction whose equity securities are listed on a national securities exchange in the United States or authorized for quotation on NASDAQ, and (B) the Corporation shall make effective provision such that, upon consummation of such transaction, the holders of Preferred Shares shall receive preferred stock of the surviving entity having substantially identical terms and registration rights as the Preferred Shares. H. Conversion of Preferred Shares. (1) Right of Conversion of Preferred Shares. Each Preferred Share shall be convertible at the option of the holder thereof, at any time or from time to time after the Closing Date, into a number of fully paid and nonassessable Common Shares equal to (x) the then applicable Mandatory Redemption Price of such Preferred Share, divided by (y) the lesser of (A) the Variable Conversion Price as of the Conversion Date or (B) 130% of the Initial Conversion Price (the "Conversion Price"); provided, however, that: (I) in no event shall the aggregate number of Common Shares issuable upon conversion of all of the Preferred Shares exceed (except at the option of the Company by reason of a Mandatory Redemption by the Company on the Maturity Date or at the option of the Company by reason of the issuance of Common Shares upon conversion of Preferred Shares issued at any time or from time to time in payment of accrued and unpaid dividends or Illiquidity Payments): (x) prior to the Second Closing, 1,500,000 Common Shares (the "Initial Closing Cap Amount"), and (y) after the Second Closing, 3,040,000 Common Shares (the "Permanent Cap Amount"); (II) in no event shall any issuance by the Company of Common Shares in payment of dividends, Illiquidity Payments or any other amounts payable pursuant to this Certificate of Amendment reduce the aggregate number of Common Shares issuable upon conversion of the Preferred Shares to less than: (x) prior to the Second Closing, the Initial Closing Cap Amount, and (y) after the Second Closing, the Permanent Cap Amount; (III) for so long as the Common Shares are listed on NASDAQ, the American Stock Exchange or the New York Stock Exchange (or any other exchange or quotation system with a rule in effect similar to NASDAQ Rule 4460(i)(D) as in effect on the Closing Date), prior to obtaining Shareholder Approval, in no event shall the aggregate number of Common Shares issued upon conversion of the Preferred Shares or otherwise issued by the Company pursuant to this Certificate of Amendment exceed 1,528,789 Common Shares (the "Rule 4460 Amount"); and (IV) in no event shall any holder of Preferred Shares be entitled to receive Common Shares upon a conversion to the extent that the sum of (x) the number of Common Shares beneficially owned by that holder and its affiliates (exclusive of shares issuable upon conversion of the unconverted portion of any Preferred Shares or the unexercised or unconverted portion of any other securities of the Corporation subject to a limitation on conversion or exercise analogous to the limitations contained herein) and (y) the number of Common Shares issuable upon the conversion of the Preferred Shares with respect to which the determination of this subclause is being made, would result in beneficial ownership by the holder and its affiliates of more than 4.9% of the outstanding Common Shares (the "Five Percent Limitation"), and for purposes of this subclause, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13 D-G thereunder, except as otherwise provided in clause (x) above. To the extent the Five Percent Limitation applies, the determination of whether Preferred Shares shall be convertible (vis-a-vis other securities owned by a holder) shall be in the sole discretion of the holder and submission of a Conversion Notice shall be deemed to be the holder's determination of whether the Preferred Shares are convertible in whole or in part, subject to such aggregate Five Percent Limitation. No prior inability to convert the Preferred Shares pursuant to this clause shall have any effect on the applicability of the provisions of this clause with respect to any subsequent determination of ability to convert. The provisions of this clause may be amended and/or implemented in a manner otherwise than in strict conformity with the terms of this clause with the approval of the Board of Directors of the Company and the affected Holder; the provisions of this clause may be waived by the affected holder upon ninety (90) days prior written notice from such holder to the Company. The limitations contained in this clause shall apply to a successor holder concurrently with its acquisition of such Preferred Shares, such election to be promptly confirmed in writing to the Company (provided no transfers to a successor holder or holders shall be used by a holder to evade the limitations contained herein). The Initial Closing Cap Amount or if applicable, the Permanent Cap Amount, shall be allocated among the holders of Preferred Shares in the same proportion as the number of Preferred Shares initially held by each holder bears to the aggregate number of outstanding Preferred Shares. Each increase to the Initial Closing Cap Amount or Permanent Cap Amount shall be allocated pro rata among the holders based on the number of Preferred Shares held by each holder at the time of the increase in the Initial Closing Cap Amount or Permanent Cap Amount. In the event a holder shall sell or otherwise transfer any of such holder's Preferred Shares, each transferee shall be allocated a pro rata portion of such transferor's Initial Closing Cap Amount or Permanent Cap Amount. Any portion of the Initial Closing Cap Amount or Permanent Cap Amount which remains allocated to any Person which does not hold any Preferred Shares shall be allocated among the remaining holders, pro rata based on the number of Preferred Shares then held by such holders. (2) Conversion Procedures. In order to exercise the conversion privilege, the holder of any Preferred Shares to be converted in whole or in part shall give written notice to the Corporation ("Conversion Notice") by confirmed facsimile, courier delivery (with receipt acknowledged), personal delivery, or registered or certified mail (with receipt acknowledged) that the holder elects to convert such shares or the portion thereof specified in said notice into shares of Common Shares and shall, within five (5) Business Days thereafter, surrender the certificate or certificates evidencing such shares to the Corporation. The Conversion Notice shall specify the effective date of such conversion, which shall be no earlier than the date of receipt and no later than 30 days following receipt, and shall also state the name or names (with address) in which the certificates for Common Shares which shall be issuable upon such conversion shall be issued. Each certificate evidencing Preferred Shares surrendered for conversion shall, unless the shares issuable on conversion are to be issued in the same name as the registration of such Preferred Shares, be duly endorsed by, or be accompanied by instruments of transfer in form satisfactory to the Corporation duly executed by, such holder or its duly authorized attorney. Within three (3) Business Days after receipt of a Conversion Notice, but not prior to the specified effective date of conversion, and following (and in no event prior to) surrender of the certificate or certificates evidencing the Preferred Shares relating thereto, the Corporation shall issue and deliver to such holder (or upon the written order of such holder) a certificate or certificates for the number of full Common Shares issuable upon the conversion of such Preferred Shares or portion thereof in accordance with the provisions of this Section H, and a check or cash in respect of any fractional Common Shares issuable upon such conversion, as provided in Section H (3). If the Corporation fails to issue certificates upon any such conversion of Preferred Shares, the Corporation shall pay to any holders of such converted Preferred Shares an amount equal to (i) 1% of the Conversion Price per day multiplied by the number of Common Shares issuable upon conversion of the Preferred Shares subject to the applicable Conversion Notice for the first 30 days after the scheduled delivery date of such certificates, and (ii) thereafter, 2% of the Conversion Price per day multiplied by the number of Common Shares issuable upon conversion of the Preferred Shares subject to the applicable Conversion Notice ("Conversion Default Payments"). Notwithstanding the foregoing, if the Corporation's failure to issue such certificates is a result of an error made by its transfer agent, such amount shall not accrue until after the third day following the scheduled delivery date of such certificate. In the event that less than all the Preferred Shares represented by a certificate are to be converted, the Corporation shall issue and deliver or cause to be issued and delivered to (or upon the written order of) the holder of the Preferred Shares so surrendered, without charge to such holder, a new certificate or certificates representing a number of Preferred Shares equal to the unconverted portion of the surrendered certificate. Each conversion shall be deemed to have been effected as of the date (the "Conversion Date") specified in the applicable Conversion Notice, or if no date is specified, as of the date on which a Conversion Notice with respect to Preferred Shares shall have been received by the Corporation by facsimile or otherwise, as described above, but only if the certificate or certificates evidencing Preferred Shares shall have been surrendered to the Corporation or its transfer agent within five (5) Business Days after receipt of the Conversion Notice relating thereto and, if such certificate or certificates shall not have been surrendered within such time period, such Conversion Notice shall be ineffective and void ab initio. Any Person in whose name any certificate or certificates for Common Shares shall be issuable upon conversion shall be deemed to have become the holder of record of the shares represented thereby on the Conversion Date; provided, however, that the receipt of a Conversion Notice on any date when the share transfer books of the Corporation shall be closed shall constitute the Person in whose name the certificates are to be issued as the record holder thereof for all purposes on the next succeeding day on which such share transfer books are open, but such conversion shall be at the Conversion Rate in effect on the Conversion Date. Except as otherwise provided in this Section H, no payment or adjustment will be made for dividends or other distributions with respect to any Common Shares issuable upon conversion of Preferred Shares as provided herein. Full payment shall be made by the Corporation to any holder of Preferred Shares surrendered for conversion in respect of dividends accrued since the last preceding Dividend Payment Date on the Preferred Shares surrendered for conversion; the dividend due on such Dividend Payment Date shall be payable with respect to such Preferred Shares notwithstanding such conversion, and such dividend (whether or not punctually paid or duly provided for) shall be paid to the holder of such shares as of the close of business on such record date. (3) Cash Payments in Lieu of Fractional Shares. No fractional Common Shares or scrip representing fractional shares shall be issued upon conversion of Preferred Shares. If any fractional Common Share would, but for this Section H, be issuable upon the conversion of any Preferred Shares, the Corporation shall make a payment therefor in cash on the third Business Day immediately following the Conversion Date equal to the Conversion Price of such fractional share. (4) Adjustment of Conversion Privileges. The Initial Conversion Price and, if any such event shall take place during a twenty (20) consecutive Trading Day calculation period, the Variable Conversion Price, shall be adjusted from time to time by the Corporation as follows: (i) In case the Corporation shall (A) declare a dividend, or make a distribution, in shares of any series of its Common Shares, on any series of its Common Shares, (B) subdivide or reclassify any series of its outstanding Common Shares into a greater number of shares, (C) combine any series of its outstanding Common Shares into a smaller number of shares, (D) pay a dividend or make a distribution on any series of its Common Shares in shares of any series of its Capital Stock other than Common Shares, or (E) issue by reclassification of any series of its Common Shares of any series of its Capital Stock, the conversion privilege and the Conversion Price in effect immediately prior thereto shall be adjusted so that the holder of any shares of Preferred Shares thereafter surrendered for conversion shall be entitled to receive the number of Common Shares or other Capital Stock of the Corporation which such holder would have owned or have been entitled to receive after the happening of any of the events described above had such Preferred Shares been converted immediately prior to the happening of such event. An adjustment made pursuant to this Section H(4) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event referred to above shall occur. In the event such dividend, distribution, subdivision, reclassification or combination is not so made, the conversion privilege then in effect shall be readjusted to the conversion privilege which would then be in effect if such dividend, distribution, subdivision, reclassification or combination had not been declared or made, but such readjustment shall not affect the number of Common Shares or other Capital Stock delivered upon any conversion prior to the date such readjustment is made. (ii) In case the Corporation shall distribute to all holders of any series of its Common Shares any of its assets or debt securities, or rights, options, warrants or convertible or exchangeable securities of the Corporation (including securities for cash, but excluding distributions of Capital Stock referred to in Section H(4)(i) above, if the adjustment to the Conversion Price under that Section would be greater than an adjustment under this Section), then in each such case, the Conversion Price shall be adjusted to equal the Conversion Price in effect immediately prior to such distribution less an amount equal to the then fair market value (as reasonably determined by the Board of Directors, in good faith and as described in a resolution of the Board of Directors) of the portion of the assets or debt securities of the Corporation so distributed or of such rights, options, warrants or convertible or exchangeable securities applicable to one share of Common Shares. Such adjustment shall become effective immediately after the record date for the determination of shares entitled to receive such distribution. Notwithstanding the foregoing, no adjustment of the Conversion Price shall be made upon the distribution to holders of any series of Common Shares of such rights, options, warrants, convertible securities, assets or debt securities if the plan or arrangement under which such rights, options, warrants, convertible securities, assets or debt securities are issued provides for their issuance to holders of shares of Preferred Shares in the same pro rata amounts upon conversion thereof. Such adjustment shall be made successively whenever any event listed above shall occur. (iii) Anything in this Section H(4) to the contrary notwithstanding, the Corporation shall be entitled to make such reductions in the Conversion Price, in addition to those required by this Section H(4), as it in its reasonable discretion shall determine to be advisable in order that any stock dividends, subdivision of shares, distribution of rights to purchase stock or securities, or distribution of securities convertible into or exchangeable for stock hereafter made by the Corporation to its shareholders, shall not be taxable. (iv) Whenever the Conversion Price is adjusted as provided in this Section H(4), or the Preferred Shares becomes convertible into shares of stock, securities, property or assets pursuant to Section H(5) below, or the Corporation reduces the Conversion Price pursuant to Section H(6) below, the Corporation shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the date on which such adjustment becomes effective, and setting forth in reasonable detail the facts requiring such adjustment and the calculation of such adjustment, and shall mail such notice of adjustment to all holders of Preferred Shares at their last addresses appearing on the share transfer books of the Corporation. (v) In any case in which this Section H(4) provides that an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of such event (i) issuing to the holder of any Preferred Shares converted after such record date and before the occurrence of such event the additional Common Shares issuable upon such conversion by reason of the adjustment required by such event over and above the Common Shares issuable upon such conversion before giving effect to such adjustment, and (ii) paying to such holder any amount in cash in lieu of any fractional Common Share pursuant to Section H(3). (vi)For purposes of any computations pursuant to this Section H(4), respecting consideration received, the following shall apply: (a) in the case of the issuance of shares of Capital Stock for cash, the consideration shall be the amount of such cash, provided that in no case shall any deduction be made for any commissions, discounts or other expenses incurred by the Corporation for any underwriting of the issue or otherwise in connection therewith; (b) in the case of the issuance of shares of Capital Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value thereof as reasonably determined in good faith by the Board of Directors or a duly authorized committee thereof (irrespective of the accounting treatment thereof), and described in a resolution of the Board of Directors or such committee; and (c) in the case of the issuance of securities convertible into or exchangeable or exercisable for shares of Capital Stock, the aggregate consideration received therefor shall be deemed to be the consideration received by the Corporation for the issuance of such securities plus the additional minimum consideration, if any, to be received by the Corporation upon the conversion or exchange thereof (the consideration in each case to be determined in the same manner as provided in clauses (a) and (b) of this Section). (vii) If after an adjustment a holder of Preferred Shares may, upon conversion of such security, receive shares of two or more classes of Capital Stock of the Corporation, the Corporation shall determine on a fair basis the allocation of the adjusted Conversion Price between the classes of Capital Stock. After such allocation, the conversion privilege and the Conversion Price of each class of Capital Stock shall thereafter be subject to adjustment on terms comparable to those applicable to Common Shares in this Section H. (viii) In no event shall an adjustment pursuant to this Section H(4) or any other provision of this Certificate of Amendment reduce the Conversion Price below the then par value, if any, of the Common Shares issuable upon conversion of Preferred Shares. (5) Effect of Reclassification, Consolidation, Merger or Sale. If any of the following events occur, namely (i) any reclassification or change of outstanding Common Shares issuable upon conversion of Preferred Shares (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), (ii) any consolidation or merger of the Corporation with another Person shall be effected as a result of which holders of Common Shares issuable upon conversion of Preferred Shares shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Shares, or (iii) any sale or conveyance of the properties and assets of the Corporation as, or substantially as, an entirety to any other Person, but in no event including a sale of the Company's Government Technology Division, then the Corporation or such successor or purchasing Person, as the case may be, shall make provisions in its certificate or articles of incorporation or other constituent documents to establish that each Preferred Share then outstanding shall be convertible into the kind and amount of shares of stock and other securities or property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a holder of the number of Common Shares issuable upon conversion of such Preferred Shares immediately prior to such reclassification, change, consolidation, merger, sale or conveyance. Such provisions shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section H. If this Section H(5) applies with respect to a transaction, Section H(4) shall not apply with respect to that transaction. The above provisions of this Section H(5) shall similarly apply to successive reclassifications, consolidations, mergers and sales. (6) Voluntary Adjustment. Subject to the Ownership Limitation, the Corporation at any time may reduce the Initial Conversion Price by any amount and for any period of time, provided that such period is not less than twenty (20) Business Days. Whenever the Initial Conversion Price is reduced pursuant to this Section 8(f), the Corporation shall mail to the Holders, a notice of the reduction at least 15 days before the date the reduced Initial Conversion Price takes effect and such notice shall state the reduced Initial Conversion Price and the period it will be in effect. (7) Taxes on Shares Issued. The issuance of share certificates upon conversion or transfer of Preferred Shares shall be made without charge to the converting holder for any tax in respect of the issuance thereof. (8) Reservation of Shares; Shares to be Fully Paid; Compliance with Governmental Requirements. The Corporation shall reserve, free from preemptive rights, out of its authorized but unissued shares, or out of shares held in its treasury, sufficient Common Shares to provide for the conversion at any time or from time to time, and/or redemption at the Maturity Date at the then applicable Mandatory Redemption Price, of all Preferred Shares from time to time outstanding. The Corporation covenants that all Common Shares which may be issued upon conversion of Preferred Shares will upon issuance be fully paid and nonassessable by the Corporation and free from all taxes, liens and charges with respect to the issuance thereof. (9) Notice to Holders Prior to Certain Actions. In the event: (i) that the Corporation shall take any action that would require an adjustment in the Conversion Price pursuant to clauses (i), (ii) or (iii) of Section H(4) above; or (ii) that any event described in Section H(5) above shall occur; or (iii) of the voluntary or involuntary dissolution, liquidation or winding-up of the Corporation; the Corporation shall cause notice of such proposed action or event to be mailed to each holder of record of Preferred Shares at its address appearing on the stock transfer books of the Corporation, as promptly as possible but in any event at least thirty (30) days prior to the record date for such proposed action or the effective date of such event; provided, however, that in the event that the Corporation provides public notice of such proposed action or event specifying the information set forth below at least ten (10) days prior to the proposed record date or effective date, the Corporation shall be deemed to have satisfied its obligation to provide notice pursuant to this Section H(9). In any event, such notice shall specify (A) the date on which a record is to be taken for the purpose of such action, or, if a record is not to be taken, the date as of which the holders of record of Common Shares are to be determined, or (B) the date on which such proposed event is expected to become effective, and the date as of which it is expected that holders of record of Common Shares shall be entitled to exchange their Common Shares for securities or other property deliverable upon such event. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such action or event. (10) Conversion Disputes. In the case of any dispute with respect to a conversion, the Corporation shall promptly issue such number of Common Shares as are not disputed in accordance with Section H hereof. If such dispute involves the calculation of the Conversion Price, the Corporation shall submit the disputed calculations, and shall permit any holder to simultaneously submit its data and views, to a "Big Six" independent accounting firm selected by the Corporation via facsimile within two (2) business days of receipt of the Conversion Notice. The accounting firm shall audit the calculations and notify the Corporation and the holder of the results no later than two (2) business days from the date it receives the disputed calculations. The accounting firm's calculation shall be deemed conclusive, absent manifest error. The Company shall then issue the appropriate number of Common Shares in accordance with Section H(2) hereof. (11) Electronic Transmission. In lieu of delivering physical certificates representing the Common Shares issuable upon the conversion of Preferred Shares, provided the Corporation's transfer agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer program, upon the written request of a holder who shall have previously instructed such holder's prime broker to confirm such request to the Corporation's transfer agent, the Corporation shall use its commercially reasonable efforts to cause its transfer agent to electronically transmit the Common Shares issuable upon conversion to the holder by crediting the account of holder's prime broker with DTC through its Deposit Withdrawal Agent Commission "DWAC") system. I. Transfers; Replacement of Certificates. (1) Transfers. Subject to any restrictions on transfer under applicable securities or other laws, Preferred Shares may be transferred on the books of the Corporation by the surrender to the Corporation of the certificate therefor properly endorsed or accompanied by a written assignment and power of attorney properly executed, with transfer stamps (if necessary) affixed, and such proof of the authenticity of signature as the Corporation or its transfer agent may reasonably require. (2) Replacement of Certificates. If any mutilated certificate representing Preferred Shares is surrendered to the Corporation, or if a holder claims the certificate representing Preferred Shares has been lost, destroyed or willfully taken, the Corporation shall issue a replacement certificate of like tenor and date if (i) the holder provides an indemnity bond or other security sufficient, in the reasonable judgment of the Corporation, to protect the Corporation and any authenticating agent and any of their officers, directors, employees or representatives from any loss which any of them may suffer if a certificate representing Preferred Shares is replaced, and (ii) the holder satisfies any other reasonable requirements of the Corporation. J. Reacquired Shares. Any Preferred Shares which are converted, purchased, redeemed or otherwise acquired by the Corporation, shall be retired and canceled by the Corporation promptly thereafter. No such shares shall upon their cancellation be reissued. K. Substitution of Senior Subordinated Notes for Non-Convertible Preferred Shares. From and after the issuance to a holder of Preferred Shares upon conversion of Preferred Shares of a number of Common Shares equal to (1) prior to the Second Closing, the Initial Closing Cap Amount with respect to that holder, and (2) after the Second Closing, the Permanent Cap Amount with respect to that holder, that holder shall have right, from and after that date, and exercisable upon 90 days' prior written notice to the Corporation, to require the Corporation to purchase all of the then outstanding shares of Preferred Stock held by such holder for an amount per share equal to the Mandatory Redemption Price, payable at the option of the Board of Directors (x) in cash, or (y) by delivery of a senior subordinated promissory note of the Corporation in the principal amount of the Mandatory Redemption Price in the form attached hereto as Exhibit A. In the event the Corporation is not able to purchase all of the Preferred Shares subject to such notices because of insufficient shareholders equity, restrictions under applicable law or pursuant to agreements, the Corporation shall purchase Preferred Shares from each holder who has given such notice, to the maximum extent, pro rata, based on the total number of Preferred Shares held by each holder who has given such notice relative to the total number of Preferred Shares held by all holders who have given such notices. THIRD: That the Corporation's Restated Certificate of Incorporation is amended so that the designation and number of shares of the Preferred Shares acted upon in the foregoing resolution, and the relative rights, preferences and limitations of such series, are as stated in the foregoing resolution. FOURTH: This Certificate of Amendment shall become effective upon filing. IN WITNESS WHEREOF, Base Ten Systems, Inc. has caused its duly authorized officer to execute this Certificate on this 4th day of December, 1997. BASE TEN SYSTEMS, INC. By:___________________________ Name: Thomas E. Gardner Title: President and Chief Executive Officer Attest: By:____________________________ Name: Edward J. Klinsport Title: Secretary Exhibit 99.4 ------------ THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS OR UNLESS OFFERED, SOLD OR TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS. COMMON STOCK PURCHASE WARRANT CERTIFICATE Dated: [ISSUANCE DATE] December 4, 1997 to Purchase 98,684 Shares of Common Stock of BASE TEN SYSTEMS, INC. BASE TEN SYSTEMS, INC., a New Jersey corporation (the "Company"), hereby certifies that [NAME OF HOLDER]SOCIETE GENERALE, its permissible transferees, designees, successors and assigns (collectively, the "Holder"), for value received, is entitled to purchase from the Company at any time commencing on December 4[ISSUANCE DATE], 1997 and terminating on March 1, 2001 up to Ninety Eight Thousand Six Hundred Eighty Four (#98,684) shares (each a "Share" and collectively the "Shares") of the Company's common stock (the "Common Stock"), at an exercise price of [130% CLOSING PRICE]$16.25 per Share (the "Exercise Price"). The number of Shares purchasable hereunder and the Exercise Price are subject to adjustment as provided in Section 4 hereof. 1. Exercise of Warrants. (a) Upon presentation and surrender of this Common Stock Purchase Warrant Certificate ("Warrant Certificate" or "Certificate"), or Lost Certificate Affidavit, accompanied by a completed Election to Purchase in the form attached hereto as Exhibit A (the "Election to Purchase") duly executed, at the principal office of the Company at One Electronics Drive, Trenton, NJ 08619, Attn: [NAME] Mr. Alexander M. Adelson, together with a check payable to the Company in the amount of the Exercise Price multiplied by the number of Shares being purchased, the Company or the Company's Transfer Agent, as the case may be, shall, within two (2) trading days of receipt of the foregoing, deliver to the Holder hereof, certificates of fully paid and non-assessable Common Stock which in the aggregate represent the number of Shares being purchased; provided, however, that the Holder may elect, with the written consent of the Company which may be granted or withheld in the Company's sole discretion (except that such consent may not be withheld if the Shares being purchased are not then registered for resale pursuant to an effective registration statement), to utilize the cashless exercise provisions set forth below in lieu of tendering the Exercise Price in cash. The certificates so delivered shall be in such denominations as may be reasonably requested by the Holder and shall be registered in the name of the Holder or such other name as shall be designated by the Holder. All or less than all of the Warrants represented by this Certificate may be exercised and, in case of the exercise of less than all, the Company, upon surrender hereof, will at the Company's expense deliver to the Holder a new Warrant Certificate or Certificates (in such denominations as may be requested by the Holder) of like tenor and dated the date hereof entitling said holder to purchase the number of Shares represented by this Certificate which have not been exercised and to receive Registration Rights with respect to such Shares, and all other rights with respect to the shares which the Holder has on the date hereof. (b) Cashless Exercise. Notwithstanding the foregoing provision regarding payment of the Exercise Price in cash, the Holder may elect, subject to the provisions of Section l(a), to receive a reduced number of Shares in lieu of tendering the Exercise Price in cash. In such case, the number of Shares to be issued to the Holder shall be computed using the following formula: X = Y(A-B) A where: X = the number of Shares to be issued to the Holder; Y = the number of Shares to be exercised under this Warrant Certificate; A = the Market Value (defined below) of one share of Common Stock; and B = the Exercise Price. As used in this Section 1, "Market Value" refers to the Current Market Value of the Common Stock on the day before the Election to Purchase and this Warrant Certificate are duly surrendered to the Company for a full or partial exercise hereof. 2. Exchange, Transfer and Replacement. (a) At any time prior to the exercise hereof, this Certificate may be exchanged upon presentation and surrender to the Company, alone or with other Certificates of like tenor of different denominations registered in the name of the same Holder, for another Certificate or Certificates of like tenor in the name of such Holder exercisable for the aggregate number of Shares as the Certificate or Certificates surrendered. (b) Replacement of Warrant Certificate. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant Certificate and, in the case of any such loss, theft, or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company (collectively, a "Lost Certificate Affidavit"), or, in the case of any such mutilation, upon surrender and cancellation of this Warrant Certificate, the Company, at its expense, will execute and deliver in lieu thereof, a new Warrant Certificate of like tenor. (c) Cancellation; Payment of Expenses. Upon the surrender of this Warrant Certificate in connection with any transfer, exchange or replacement as provided in this Section 2, this Warrant Certificate shall be promptly canceled by the Company. The Company shall pay all taxes (other than securities transfer taxes) and all other expenses (other than legal expenses, if any, incurred by the Holder or transferees) and charges payable in connection with the preparation, execution and delivery of Warrant Certificates pursuant to this Section 2. (d) Warrant Register. The Company shall maintain, at its principal executive offices (or at the offices of the transfer agent for the Warrant Certificate or such other office or agency of the Company as it may designate by notice to the holder hereof), a register for this Warrant Certificate (the "Warrant Register"), in which the Company shall record the name and address of the person in whose name this Warrant Certificate has been issued, as well as the name and address of each permitted transferee and each prior owner of this Warrant Certificate. 3. Rights and Obligations of Holders of this Certificate. The Holder of this Certificate shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or in equity; provided, however, that in the event any certificate representing shares of Common Stock or other securities is issued to the holder hereof upon exercise of some or all of the Warrants, such holder shall, for all purposes, be deemed to have become the holder of record of such Common Stock on the date on which this Certificate, together with a duly executed Purchase Form, was surrendered and payment of the aggregate Exercise Price was made, irrespective of the date of delivery of such share certificate. 4. Adjustments. (a) Stock Dividends, Reclassifications, Recapitalizations, Etc. In the event the Company: (i) pays a dividend in Common Stock or makes a distribution in Common Stock, (ii) subdivides its outstanding Common Stock into a greater number of shares, (iii) combines its outstanding Common Stock into a smaller number of shares or (iv) increases or decreases the number of shares of Common Stock outstanding by reclassification of its Common Stock (including a recapitalization in connection with a consolidation or merger in which the Company is the continuing corporation), then (1) the Exercise Price on the record date of such division or distribution or the effective date of such action shall be adjusted by multiplying such Exercise Price by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately before such event and the denominator of which is the number of shares of Common Stock outstanding immediately after such event, and (2) the number of shares of Common Stock for which this Warrant Certificate may be exercised immediately before such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the Exercise Price immediately before such event and the denominator of which is the Exercise Price immediately after such event. (b) Cash Dividends and Other Distributions. In the event that at any time or from time to time the Company shall distribute to all holders of Common Stock (i) any dividend or other distribution of cash, evidences of its indebtedness, shares of its capital stock or any other properties or securities or (ii) any options, warrants or other rights to subscribe for or purchase any of the foregoing (other than in each case, (w) the issuance of any rights under a shareholder rights plan, (x) any dividend or distribution described in Section 4(a), (y) any rights, options, warrants or securities described in Section 4(c) and (z) any cash dividends or other cash distributions from current earnings), then the number of shares of Common Stock issuable upon the exercise of each Warrant Certificate shall be increased to a number determined by multiplying the number of shares of Common Stock issuable upon the exercise of such Warrant Certificate immediately prior to the record date for any such dividend or distribution by a fraction, the numerator of which shall be such Current Market Value (as hereinafter defined) per share of Common Stock on the record date for such dividend or distribution, and the denominator of which shall be such Current Market Value per share of Common Stock on the record date for such dividend or distribution less the sum of (x) the amount of cash, if any, distributed per share of Common Stock and (y) the fair value (as determined in good faith by the Board of Directors of the Company, whose determination shall be evidenced by a board resolution, a copy of which will be sent to the Holders upon request) of the portion, if any, of the distribution applicable to one share of Common Stock consisting of evidences of indebtedness, shares of stock, securities, other property, warrants, options or subscription or purchase rights; and the Exercise Price shall be adjusted to a number determined by dividing the Exercise Price immediately prior to such record date by the above fraction. Such adjustments shall be made whenever any distribution is made and shall become effective as of the date of distribution, retroactive to the record date for any such distribution. No adjustment shall be made pursuant to this Section 4(b) which shall have the effect of decreasing the number of shares of Common Stock issuable upon exercise of each Warrant Certificate or increasing the Exercise Price. (c) Rights Issue. In the event that at any time or from time to time the Company shall issue rights, options or warrants entitling the holders thereof to subscribe for shares of Common Stock, or securities convertible into or exchangeable or exercisable for Common Stock to all holders of Common Stock (other than in connection with the adoption of a shareholder rights plan by the Company) without any charge, entitling such holders to subscribe for or purchase shares of Common Stock at a price per share that as of the record date for such issuance is less than the then Current Market Value per share of Common Stock, the number of shares of Common Stock issuable upon the exercise of each Warrant Certificate shall be increased to a number determined by multiplying the number of shares of Common Stock theretofore issuable upon exercise of each Warrant Certificate by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding on the date of issuance of such rights, options, warrant or securities plus the number of additional shares of Common Stock offered for subscription or purchase or into or for which such securities that are issued are convertible, exchangeable or exercisable, and the denominator of which shall be the number of shares of Common Stock outstanding on the date of issuance of such rights, option, warrants or securities plus the total number of shares of Common Stock which the aggregate consideration expected to be received by the Company (assuming the exercise or conversion of all such rights, options, warrants or securities) would purchase at the then Current Market Value per share of Common Stock. In the event of any such adjustment, the Exercise Price shall be adjusted to a number determined by dividing the Exercise price immediately prior to such date of issuance by the aforementioned fraction. Such adjustment shall be made immediately after such rights, options or warrants are issued and shall become effective, retroactive to the record date for the determination of stockholders entitled to receive such rights, options, warrants or securities. No adjustment shall be made pursuant to this Section 4(c) which shall have the effect of decreasing the number of shares of Common Stock purchasable upon exercise or each Warrant Certificate or of increasing the Exercise Price. (d) Combination: Liquidation. (i) Except as provided in Section 4(d)(ii) below, in the event of a Combination (as defined below), each Holder shall have the right to receive upon exercise of the Warrant Certificates the kind and amount of shares of capital stock or other securities or property which such Holder would have been entitled to receive upon or as a result of such Combination had such Warrant Certificate been exercised immediately prior to such event (subject to further adjustment in accordance with the terms hereof). Unless paragraph (ii) is applicable to a Combination, the Company shall provide that the surviving or acquiring Person (the "Successor Company") in such Combination will assume by written instrument the obligations under this Section 4 and the obligations to deliver to the Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, the Holder may be entitled to acquire. The provisions of this Section 4(d)(i) shall similarly apply to successive Combinations involving any Successor Company. "Combination" means an event in which the Company consolidates with, mergers with or into, or sells all or substantially all of its assets to another Person, where "Person" means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity, but shall not include the sale of substantially all of the assets of the Government Technology Division of the Company. (ii) In the event of (x) a Combination where consideration to the holders of Common Stock in exchange for their shares is payable solely in cash or (y) the dissolution, liquidation or winding-up of the Company, the Holders shall be entitled to receive, upon surrender of their Warrant Certificates, distributions on an equal basis with the holders of Common Stock or other securities issuable upon exercise of the Warrant Certificates, as if the Warrant Certificates had been exercised immediately prior to such event, less the Exercise Price. In case of any Combination described in this Section 4(d)(ii), the surviving or acquiring Person and, in the event of any dissolution, liquidation or winding-up of the Company, the Company, shall deposit promptly following the consummation of such combination or at the time of such dissolution, liquidation or winding-up with an agent or trustee for the benefit of the Holders of the funds, if any, necessary to pay to the Holders the amounts to which they are entitled as described above. After such funds and the surrendered Warrant Certificates are received, the Company is required to deliver a check in such amount as is appropriate (or, in the case of consideration other than cash, such other consideration as is appropriate) to such Person or Persons as it may be directed in writing by the Holders surrendering such Warrant Certificates. (e) Notice of Adjustment. Whenever the Exercise Price or the number of shares of Common Stock and other property, if any, issuable upon exercise of the Warrant Certificates is adjusted, as herein provided, the Company shall deliver to the holders of the Warrant Certificates in accordance with Section 10 a certificate of the Company's Chief Financial Officer setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment was calculated (including a description of the basis on which (i) the Board of Directors determined the fair value of any evidences of indebtedness, other securities or property or warrants, options or other subscription or purchase rights and (ii) the Current Market Value of the common Stock was determined, if either of such determinations were required), and specifying the Exercise Price and number of shares of Common Stock issuable upon exercise of Warrant Certificates after giving effect to such adjustment. (f) Purchase Price Adjustment. In the event that the Company issues or sells any Common Stock or securities which are convertible into or exchangeable for its Common Stock or any convertible securities, or any warrants or other rights to subscribe for or to purchase or any options for the purchase of its Common Stock or any such convertible securities (other than shares or options issued or which may be issued pursuant to the Company's employee or director option plans or shares issued upon exercise of options, warrants or rights outstanding on the date of the Agreement and listed in the Company's most recent periodic report filed under the Exchange Act or disclosed in Schedule 3.3 to the Purchase Agreement) and other than the Second Closing (as defined in the Purchase Agreement) at an effective purchase price per share which is less than the Current Market Value of the Common Stock on the trading day next preceding such issue or sale, then in each such case, the Exercise Price in effect immediately prior to such issue or sale shall be reduced effective concurrently with such issue or sale to an amount determined by multiplying the Exercise Price then in effect by a fraction, (x) the numerator of which shall be the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issue or sale, plus (2) the number of shares of Common Stock which the aggregate consideration received by the Company for such additional shares would purchase at such Current Market Value then in effect; and (y) the denominator of which shall be the number of shares of Common Stock of the Company outstanding immediately after such issue or sale. For the purposes of the foregoing adjustment, in the case of the issuance of any convertible securities, warrants, options or other rights to subscribe for or to purchase or exchange for, shares of Common Stock ("Convertible Securities"), the maximum number of shares of Common Stock issuable upon exercise, exchange or conversion of such Convertible Securities shall be deemed to be outstanding, provided that no further adjustment shall be made upon the actual issuance of Common Stock upon exercise, exchange or conversion of such Convertible Securities. The number of shares which may be purchased hereunder shall be increased proportionately to any reduction in Exercise Price pursuant to this paragraph 4(d), so that after such adjustments the aggregate Exercise Price payable hereunder for the increased number of shares shall be the same as the aggregate Exercise Price in effect just prior to such adjustment. In the event of any such issuance for a consideration which is less than such fair market value and also less than the Exercise Price then in effect, than there shall be only one such adjustment by reason of such issuance, such adjustment to be that which results in the greatest reduction of the Purchase Price computer as aforesaid. (g) Notice of Certain Transactions. In the event that the Company shall propose (a) to pay any dividend payable in securities of any class to the holders of its Common Stock or to make any other non-cash dividend or distribution to the holders of its Common Stock, (b) to offer the holders of its Common Stock rights to subscribe for or to purchase any securities convertible into shares of Common Stock or shares of stock of any class or any other securities, rights or options, (c) to effect any capital reorganization, reclassification, consolidation or merger affecting the class of Common Stock, as a whole, or (d) to effect the voluntary or involuntary dissolution, liquidation or winding-up of the Company, the Company shall, within the time limits specified below, send to each Holder a notice of such proposed action or offer. Such notice shall be mailed to the Holders at their addresses as they appear in the Warrant Register (as defined in Section 2(d)), which shall specify the record date for the purposes of such dividend, distribution or rights, or the date such issuance or event is to take place and the date of participation therein by the holders of Common Stock, if any such date is to be fixed, and shall briefly indicate the effect of such action on the number of shares of Common Stock and on the number and kind of any other shares of stock and on other property, if any, and the number of shares of Common Stock and other property, if any, issuable upon exercise of each Warrant Certificate and the Exercise Price after giving effect to any adjustment pursuant to Section 4 which will be required as a result of such action. Such notice shall be given as promptly as possible and (x) in the case of any action covered by clause (a) or (b) above, at least 10 days prior to the record date for determining holders of the Common Stock for purposes of such action or (y) in the case of any other such action, at least 20 days prior to the date of the taking of such proposed action or the date of participation therein by the holders of Common Stock, whichever shall be the earlier. (h) Current Market Value. "Current Market Value" per share of Common Stock or any other security at any date means (i) if the security is not registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (a) the value of the security, determined in good faith by the Board of Directors of the Company and certified in a board resolution, based on the most recently completed arm's-length transaction between the Company and a Person other than an affiliate of the Company or between any two such Persons and the closing of which occurs on such date or shall have occurred within the six-month period preceding such date, or (b) if no such transaction shall have occurred within the six-month period, the value of the security as determined by an independent financial expert or (ii) if the security is registered under the Exchange Act, the average of the daily closing bid prices (or the equivalent in an over-the-counter market) for each day on which the Common Stock is traded for any period on the principal securities exchange or other securities market on which the common Stock is being traded (each, a "Trading Day") during the period commencing ten (10) Trading Days before such date and ending on the date one day prior to such date, or if the security has been registered under the Exchange Act for less than ten (10) consecutive Trading Days before such date, the average of the daily closing bid prices (or such equivalent) for all of the Trading Days before such date for which daily closing bid prices are available; provided, however, that if the closing bid price is not determinable for at least five (5) Trading Days in such period, the "Current Market Value" of the security shall be determined as if the security were not registered under the Exchange Act. (i) Other Adjustments. If the event of any other transaction of the type contemplated by this Section 4, but not expressly provided for by the provisions hereof, the Board of Directors of the Company will make appropriate adjustment in the Exercise Price so as to equitably protect the rights of the Holder. (j) No Impairment of Holder's Rights. The Company will not, by amendment of its certificate of incorporation or bylaws or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, except as contemplated hereby, avoid or seek to avoid the observance or performance of any of the terms of this Warrant Certificate, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all action as may be necessary or appropriate in order to protect the rights of the Holder against dilution or other impairment. Without limiting the generality of the foregoing, the Company will not increase the par value of any shares of Common Stock receivable upon exercise of this Warrant above the Exercise Price then in effect. 5. Company's Representations. The representations, warranties and agreements of the Company contained in Sections 3 and 4 of the Securities Purchase Agreement dated December 4, 1997 ("Purchase Agreement") among the Company, the initial Holder and the other parties thereto are incorporated by reference herein. 6. Registration Rights. The initial Holder is entitled to the benefit of such registration rights in respect of the Shares as are set forth in the Registration Rights Agreement dated as of December 4, 1997 by and between the Company, the Holder and the other parties thereto, including the right to assign such rights to certain assignees as set forth therein. 7. Issuance of Certificates. Within two (2) trading days of receipt of a duly completed Election to Purchase form, together with this Certificate and payment of the Exercise Price, the Company, at its expense, will cause to be issued in the name of and delivered to the Holder of this Warrant, a certificate or certificates for the number of fully paid and non-assessable shares of Common Stock to which that holder shall be entitled on such exercise. In the event the shares of Common Stock are not timely delivered to the Holder, the Company agrees to (a) indemnify Holder for all damages, including consequential and special damages, lost profits and expenses, including legal fees, and (b) beginning on the fifth (5th) day following the Company's receipt of a duly completed Election to Purchase form, pay a default premium of 2% per day of the value of underlying shares (based on the highest closing price during the two (2) day period preceding the date of surrender of the Warrant Certificate). In lieu of issuance of a fractional share upon any exercise hereunder, the Company will pay the cash value of that fractional share, calculated on the basis of the Exercise Price. Prior to registration of the resale of the shares of Common Stock underlying this Warrant Certificate, all such certificates shall bear a restrictive legend to the effect that the Shares represented by such certificate have not been registered under the Securities Act, and that the Shares may not be sold or transferred in the absence of such registration or an exemption therefrom, such legend to be substantially in the form of the bold-face language appearing at the top of Page 1 of this Warrant Certificate. 8. Disposition of Warrants or Shares. The Holder of this Warrant Certificate, each transferee hereof and any holder and transferee of any Shares, by his or its acceptance thereof, agrees that no public distribution of Warrants or Shares will be made in violation of the provisions of the Securities Act. Furthermore, it shall be a condition to the transfer of the Warrants that any transferee thereof deliver to the Company his or its written agreement to accept and be bound by all of the relevant terms and conditions contained in this Warrant Certificate. 9. Merger or Consolidation. The Company will not merge or consolidate with or into any other corporation, or sell or otherwise transfer its property, assets and business substantially as an entirety to another corporation, unless the corporation resulting from such merger or consolidation (if not the Company), or such transferee corporation, as the case may be, shall expressly assume, by supplemental agreement reasonably satisfactory in form and substance to the Holder, the due and punctual performance and observance of each and every covenant and condition of this Warrant Certificate to be performed and observed by the Company. 10. Notices. Except as otherwise specified herein to the contrary, all notices, requests, demands and other communications required or desired to be given hereunder shall only be effective if given in writing by certified or registered U.S. mail with return receipt requested and postage prepaid; by private overnight delivery service (e.g. Federal Express); by facsimile transmission (if no original documents or instruments must accompany the notice); or by personal delivery. Any such notice shall be deemed to have been given (a) on the business day immediately following the mailing thereof, if mailed by certified or registered U.S. mail as specified above; (b) on the business day immediately following deposit with a private overnight delivery service if sent by said service; (c) upon receipt of confirmation of transmission if sent by facsimile transmission; or (d) upon personal delivery of the notice. All such notices shall be sent to the following addresses (or to such other address or addresses as a party may have advised the other in the manner provided in this Section 10): If to the Company: Base Ten Systems, Inc. One Electronics Drive Trenton, NJ 08619 Telephone: (609) 586-7010 Telecopy: (609) 586-1593 Attention: Mr. Alexander M. Adelson with a copy to: Battle, Fowler LLP 75 East 55th Street Park Avenue Tower New York, NY 10022 Telephone: (212) 856-7000 Telecopy: (212) 856 7822 Attention: David Warburg, Esq. If to Societe Generale: Societe Generale 1221 Avenue of the Americas 6th Floor New York, NY 10020 Telephone: (212) 278-5260 Telecopy: (212) 278-5467 Attention: Mr. Guillaume Pollet in each case with a copy to: Shoreline Pacific Institutional Finance 3 Harbor Drive, Suite 211 Sausalito, CA 94965 Telephone: (415) 332-7800 Telecopy: (415) 332-7808 Attention: General Counsel and: Cowen & Co. 1 Financial Square New York, NY 10005 Telephone: (212) 495-3950 Telecopy: (212) 495-8305 Attention: Mr. Bill Smith Notwithstanding the time of effectiveness of notices set forth in this Section, an Election to Purchase shall not be deemed effectively given until it has been duly completed and submitted to the Company together with the original Warrant Certificate to be exercised and payment of the Exercise Price in a manner set forth in this Section. 11. Governing Law. This Agreement shall be governed by and construed in accordance with the law of the Company's jurisdiction of incorporation (in respect of matters of corporation law) and the laws of the State of New York (in respect of all other matters) applicable to contracts made and to be performed in the State of New York. The parties hereto irrevocably consent to the jurisdiction of the United States federal courts and state courts located in the Borough of Manhattan in the State of New York in any suit or proceeding based on or arising under this Agreement or the transactions contemplated hereby and irrevocably agree that all claims in respect of such suit or proceeding may be determined in such courts. The Company and the Holder irrevocably waives the defense of an inconvenient forum to the maintenance of such suit or proceeding in such forum. The Company and the Holder further agree that service of process upon the Company or the Holder, as applicable, mailed by the first class mail in accordance with Section 10 shall be deemed in every respect effective service of process upon the Company or the Holder in any suit or proceeding arising hereunder. Nothing herein shall affect the Holder's right to serve process in any other manner permitted by law. The parties hereto agree that a final non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. The parties hereto irrevocably waive any right to trial by jury under applicable law. 12. Limitations on Holdings. The Warrant shall not be exercisable by a Holder to the extent (but only to the extent) that, if exercised by such Holder, the Holder would beneficially own in excess of 4.9% (9.9% if the applicable box on the signature page of the Securities Purchase Agreement for such Holder is marked) (the "Applicable Percentage") of the shares of Common Stock. To the extent the foregoing limitation applies, the determination of whether this Warrant Certificate shall be exercisable (vis-a-vis other securities owned by such Holder) shall be in the sole discretion of the Holder and submission of an Election to Purchase shall be deemed to be the Holder's determination of whether the Warrant Certificate is exercisable in whole or in part, subject to such aggregate percentage limitation. No prior inability to exercise the Warrant Certificate pursuant to this Section shall have any effect on the applicability of the provisions of this Section with respect to any subsequent determination of ability to exercise. For the purposes of this Section, beneficial ownership and all calculations, including without limitation, with respect to calculations of percentage ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13D-G thereunder. The provisions of this Section may be amended and/or implemented in a manner otherwise than in strict conformity with the terms of this Section with the approval of the Board of Directors of the Company and the affected Holder: (i) with respect to any matter to cure any ambiguity herein, to correct this subsection (or any portion thereof) which may be defective or inconsistent with the intended Applicable Percentage beneficial ownership limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such Applicable Percentage limitation; and (ii) with respect to any other matter, with the further consent of the holders of majority of the then outstanding shares of Common Stock; the provisions of this Section may be waived with the approval of the affected Holder upon ninety (90) days prior written notice from such Holder to the Company and all other Holders. The limitations contained in this Section shall apply to a successor Holder of Preferred Stock this Warrant if, and to the extent, elected by such successor Holder concurrently with its acquisition of such Preferred Stock this Warrant, such election to be promptly confirmed in writing to the Company (provided no transfer or series of transfers to a successor Holder or Holders shall be used by a Holder to evade the limitations contained herein). 13. Successors and Assigns. This Warrant Certificate shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. 14. Headings. The headings of various sections of this Warrant Certificate have been inserted for reference only and shall not affect the meaning or construction of any of the provisions hereof. 15. Severability. If any provision of this Warrant Certificate is held to be unenforceable under applicable law, such provision shall be excluded from this Warrant Certificate, and the balance hereof shall be interpreted as if such provision were so excluded. 16. Modification and Waiver. This Warrant Certificate and any provision hereof may be amended, waived, discharged or terminated only by an instrument in writing signed by the Company and the Holder. 17. Specific Enforcement. The Company and the Holder acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Warrant Certificate were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Warrant Certificate and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which either of them may be entitled by law or equity. 18. Assignment. This Warrant Certificate may be transferred or assigned, in whole or in part, at any time and from time to time by the then Holder by submitting this Warrant to the Company together with a duly executed Assignment in substantially the form and substance of the Form of Assignment which accompanies this Warrant Certificate and, upon the Company's receipt hereof, and in any event, within three (3) business days thereafter, the Company shall issue a Warrant Certificate to the Holder to evidence that portion of this Warrant Certificate, if any as shall not have been so transferred or assigned. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed, manually or by facsimile, by one of its officers thereunto duly authorized. BASE TEN SYSTEMS, INC. Date:____________________ By:_________________________ Name: Title: ELECTION TO PURCHASE To Be Executed by the Holder in Order to Exercise the Common Stock Purchase Warrant Certificate The undersigned Holder hereby elects to exercise _________ of the Warrants represented by the attached Common Stock Purchase Warrant Certificate, and to purchase the shares of Common Stock issuable upon the exercise of such Warrants, and requests that certificates for securities be issued in the name of: EX-99.3 4 EXHIBIT PROXY STATEMENT CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 Filed by the Registrant /X/ Filed by a Party other than the Registrant / / Check the appropriate box: / / Preliminary Proxy Statement / / Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) /X/ Definitive Proxy Statement / / Definitive Additional Materials / / Soliciting Material Pursuant to Section 240.14a-11(c) or Section240.14a-12 BASE TEN SYSTEMS, INC. - -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement if other than the Registrant) Payment of Filing Fee (Check the appropriate box): / / No fee required /X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(4)and 0-11. (1) Title of each class of securities to which transaction applies: ----------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: ----------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): $6,500,000.00 (bona fide estimate of cash and value of the property to be received by the Registrant). (4) Proposed maximum aggregate value of transaction: $6,500,000.00 (5) Total fee paid: $1,300.00 /X/ Fee paid previously with preliminary materials. / / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11-(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: ----------------------------------------------------------------------- (2) Form, Schedule or Registration Statement No.: ----------------------------------------------------------------------- (3) Filing Party: ----------------------------------------------------------------------- (4) Date Filed: ----------------------------------------------------------------------- [LOGO] December 15, 1997 Dear Shareholder: You are cordially invited to attend a Special Meeting (the "Meeting") of Shareholders of Base Ten Systems, Inc., (the "Company" or "Base Ten") which will be held at 9:00 a.m., local time, on Wednesday, December 31, 1997, at the executive offices of Base Ten Systems, Inc., One Electronics Drive, Trenton, New Jersey. At the Meeting, holders of outstanding shares of the Company's Class A Common Stock ("Class A Stock") and Class B Common Stock ("Class B Stock"; the Class A Stock and Class B Stock are hereinafter sometimes referred to collectively as the "Common Stock") voting as a class with respect to certain of the proposed matters (each share of Class A stock having one-tenth of a vote on each matter and each share of Class B Stock having one vote on each matter) will be asked to consider and approve three separate proposals, including a proposal concerning the sale (the "Sale") of the Government Technology Division of Base Ten to Strategic Technology Systems, Inc., a newly organized company that will be managed by certain members of the Company's senior management who have been over time, and are currently, significantly involved in the business and development of the Government Technology Division. At July 31, 1997 and October 31, 1996, the assets of the GTD represented approximately 28% and 30%, respectively, of total Company assets. For the nine months ended July 31, 1997, revenues from the GTD represented approximately 83% of total Company revenues, compared with approximately 90% of total Company revenues for the year ended October 31, 1996. If the Sale is consummated, the Company will receive aggregate cash consideration of $3.5 million, a promissory note in a principal amount presently estimated to be between approximately $2.0 million and $2.2 million, and certain other consideration. See "The Proposal Sale of the Government Technology Division--The Purchase Agreement, Note and Warrant" in the accompanying Proxy Statement. The total consideration to be received by the Company from the sale is believed by the Company to be approximately $6.9 million (the present value assigned to the consideration by the financial advisor retained by the Special Committee of the Board of Directors for purposes of rendering an opinion with regard to the fairness from a financial point of view, to Base Ten of the Sale; see "The Proposed Sale of the Government Technology Division--Opinion of Financial Advisor to the Special Committee" in the accompany Proxy Statement), which amounts to approximately $0.85 per share of outstanding Common Stock of the Company. The proposed Sale is described in the accompanying Proxy Statement. Also included in the accompanying Proxy Statement are proposals (i) to approve, in order to comply with ongoing listing requirements of NASDAQ, the possible future issuance, upon conversion of certain convertible preferred stock that is proposed to be issued on the terms described in the accompanying Proxy Statement, of shares of Class A Stock that may represent twenty percent (20%) or more of the outstanding shares of Class A Stock of Base Ten at a price which will be determined as of the date of conversion of such convertible preferred stock, that may therefore be below the market price of the Class A Stock on the date the convertible preferred stock is initially issued by the Company; and (ii) to approve and adopt amendments to four Company stock option plans (the Base Ten Stock Option Plan, 1990 Incentive Stock Option, the 1992 Stock Option Plan and the 1995 Incentive Stock Option Plan; hereinafter sometimes collectively referred to as the "Incentive Option Plans"), concerning an extension of the period within which certain options may be exercised following termination of employment. I urge you carefully to review the Proxy Statement and the Exhibits thereto. THE BASE TEN BOARD OF DIRECTORS HAS DETERMINED THAT THE SALE OF THE GOVERNMENT TECHNOLOGY DIVISION, THE APPROVAL OF A POSSIBLE FUTURE ISSUANCE OF ADDITIONAL SHARES OF CLASS A STOCK UPON CONVERSION OF CONVERTIBLE PREFERRED STOCK AND APPROVAL OF THE PROPOSED AMENDMENTS TO THE BASE TEN INCENTIVE OPTION PLANS ARE EACH IN THE BEST INTERESTS OF BASE TEN AND ITS SHAREHOLDERS. ACCORDINGLY, THE BOARD UNANIMOUSLY APPROVED EACH OF THE THREE PROPOSALS AND RECOMMENDS THAT THE HOLDERS OF BASE TEN COMMON STOCK VOTE IN FAVOR OF EACH AT THE MEETING. I hope you will attend the Meeting. HOWEVER, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN AND DATE THE ACCOMPANYING PROXY CARD PROMPTLY AND RETURN IT IN THE ENCLOSED PREPAID ENVELOPE. IF YOU ARE PRESENT AT THE MEETING YOU MAY, IF YOU WISH, WITHDRAW YOUR PROXY AND VOTE IN PERSON. Sincerely, MYLES M. KRANZLER Chairman of the Board BASE TEN SYSTEMS, INC. ONE ELECTRONICS DRIVE TRENTON, NEW JERSEY 08619 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON DECEMBER 31, 1997 NOTICE IS HEREBY GIVEN that a special meeting of shareholders of Base Ten Systems, Inc., a New Jersey corporation (the "Company" or "Base Ten"), will be held on Wednesday, December 31, 1997, at 9:00 a.m. local time at the executive offices of the Company, One Electronics Drive, Trenton, New Jersey (the "Meeting"), for the following purposes: 1. To approve and adopt that certain Asset Purchase Agreement that provides for the sale ("Sale") of all of the assets, subject to certain liabilities, of the Government Technology Division of the Company to Strategic Technology Systems, Inc., a newly formed corporation that will be managed by certain members of the Company's senior management who have been over time, and are currently, significantly involved in the business and development of the Government Technology Division; 2. To approve the possible future issuance, upon conversion of certain convertible preferred stock that is proposed to be issued on the terms described in the accompanying Proxy Statement, of shares of Class A Stock that may represent twenty percent (20%) or more of the outstanding shares of Class A Stock of Base Ten at a price which will be determined as of the date of conversion of such convertible preferred stock, that may therefore be below the market price of the Class A Stock on the date the convertible preferred stock is initially issued by the Company, which approval is necessary in order to meet the continued listing requirements for the Class A Common Stock on the NASDAQ National Market System ("NASDAQ"); 3. To approve amendments to four Company stock option plans (the Base Ten Stock Option Plan, the 1990 Incentive Stock Option, the 1992 Stock Option Plan and the 1995 Incentive Stock Option Plan) concerning the extension of the period within which certain options may be exercised following termination of employment; and 4. To transact such other business as may properly come before the Meeting or any adjournment or postponement thereof. The Board of Directors has fixed the close of business on November 14, 1997, as the record date for the Meeting. Only shareholders of record at that time are entitled to notice of, and to vote at, the Meeting and any adjournment or postponement thereof. A list of shareholders entitled to vote at the Meeting will be available for examination 10 days before the Meeting during ordinary business hours at the offices of the Company. Management is of the view that the Company's shareholders are not entitled to dissenters' rights of appraisal in connection with any of the proposals covered by this Proxy Statement, including the Sale. The enclosed proxy is solicited by the Board of Directors of the Company. Reference is made to the attached Proxy Statement for further information with respect to the business to be transacted at the Meeting. The Board of Directors urges you to date, sign and return the enclosed proxy promptly. A reply envelope is enclosed for your convenience. You are cordially invited to attend the Meeting in person. The return of the enclosed proxy will not affect your right to vote if you attend the Meeting in person. By Order of the Board of Directors [LOGO] EDWARD J. KLINSPORT Chief Financial Officer, Executive Vice President and Secretary Dated: December 15, 1997 YOUR VOTE IS IMPORTANT TO VOTE YOUR SHARES, PLEASE SIGN, DATE AND COMPLETE THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE TABLE OF CONTENTS PAGE --------- LETTER TO SHAREHOLDERS......................... i NOTICE OF SPECIAL MEETING...................... iii TABLE OF CONTENTS.............................. v THE SPECIAL MEETING............................ 1 General...................................... 1 Matters to be Considered at the Meeting...... 1 Voting at the Meeting; Record Date........... 2 Security Ownership of Management and Certain Beneficial Owners.......................... 2 Proxies...................................... 4 THE PROPOSED SALE OF THE GOVERNMENT TECHNOLOGY DIVISION...................................... 5 Overview..................................... 5 Background................................... 5 Recommendation of the Base Ten Board and Base Ten's Reasons for the Sale................. 9 Opinion of Financial Advisor to the Special Committee.................................. 10 Certain Projected Financial Information................................ 14 Interests of Certain Persons in the Sale and Certain Arrangements Regarding Certain Directors and Management of Base Ten Following the Sale; Conflicts of Interest................................... 16 Certain Tax Consequences of the Sale......... 18 The Purchase Agreement, Note and Warrant..... 18 Regulatory Filings and Approvals............. 22 Accounting Treatment......................... 22 Expenses and Other Fees...................... 22 Appraisal Rights............................. 22 Required Vote................................ 22 The Government Technology Division........... 22 Unaudited Pro Forma Financial Statements of the Company................................ 27 Information Concerning the Purchaser......... 32 INFORMATION CONCERNING BASE TEN SYSTEMS, INC... 32 Selected Financial Data...................... 32 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 34 Business..................................... 41 Legal Proceedings............................ 47 Market for the Company's Common Stock and Related Shareholder Matters................ 47 THE PROPOSED ISSUANCE.......................... 49 Background................................... 48 Terms of the Issuance........................ 48 Reasons for the Proposal..................... 48 Risk Factors................................. 49 Use of Proceeds.............................. 50 Interests of Certain Persons in the Issuance; Conflicts of Interests..................... 50 Required Vote................................ 50 THE PROPOSED OPTION PLAN AMENDMENTS............ 51 General...................................... 51 Description of the Plans..................... 51 Administration of the Plans.................. 52 Amendment of the Plans....................... 52 Principal Federal Income Tax Consequences.... 52 Benefits to Certain Persons of the Proposed Amendments................................. 53 Accounting Treatment......................... 53 Required Vote................................ 53 ATTENDANCE OF AUDITORS AT THE MEETING.......... 53 SHAREHOLDER PROPOSALS.......................... 53 APPRAISAL RIGHTS............................... 54 INDEX TO FINANCIAL STATEMENTS.................................... F-1 EXHIBITS: A. Opinion of Financial Advisor to the Special Committee................................... A-1 B. New Jersey Appraisal Statute................ B-1 BASE TEN SYSTEMS, INC. ONE ELECTRONICS DRIVE TRENTON, NEW JERSEY 08619 ------------------------ PROXY STATEMENT ------------------------ Special Meeting of Shareholders to be held on Wednesday, December 31, 1997 ------------------------ THE SPECIAL MEETING GENERAL This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of Base Ten Systems, Inc., a New Jersey corporation ("Base Ten" or the "Company"), to be used at a Special Meeting of Shareholders, and any adjournment or postponement thereof (the "Meeting"), to be held on the date, at the time and place, and for the purposes set forth in the foregoing notice. This Proxy Statement, the accompanying notice and the enclosed proxy card are first being mailed to shareholders on or about December 15, 1997. The Board of Directors of the Company (the "Board" or the "Base Ten Board") does not intend to bring any matter before the Meeting except as specifically indicated in the notice, nor does the Board know of any matters that anyone else proposes to present for action at the Meeting. However, if any other matters properly come before the Meeting, the persons named in the enclosed proxy, or their duly constituted substitutes acting at the Meeting, will be authorized to vote or otherwise act thereon in accordance with their judgment on such matters. MATTERS TO BE CONSIDERED AT THE MEETING At the Meeting, holders of Base Ten Class A Common Stock ("Class A Stock") and Base Ten Class B Common Stock ("Class B Stock"; the Class A Stock and Class B Stock are hereinafter sometimes referred to collectively as the "Common Stock") will consider and vote upon: (i) a proposal to approve and adopt the Asset Purchase Agreement providing for the sale of all of the assets, subject to certain liabilities, of the Government Technology Division of the Company to Strategic Technology Systems, Inc. (the "Purchaser"), a newly formed corporation that will be managed by certain members of the Company's senior management who have been over time, and are currently, significantly involved in the business and development of the Government Technology Division (the "Sale"); (ii) a proposal to approve the possible future issuance, upon conversion of certain convertible preferred stock that is proposed to be issued on the terms described in the accompanying Proxy Statement, of shares of Class A Stock that may represent twenty percent (20%) or more of the outstanding shares of Class A Stock of Base Ten at a price which will be determined as of the date of conversion of such convertible preferred stock, that may therefore be below the market price of the Class A Stock on the date the convertible preferred stock is initially issued by the Company (the "Issuance"), which approval is necessary in order to meet the continued listing requirements for the Class A Common Stock on the NASDAQ National Market System ("NASDAQ"); and (iii) a proposal to approve and adopt amendments to four of the Company's stock option plans (the Base Ten Stock Option Plan, the 1990 Incentive Stock Option Plan, the 1992 Stock Option Plan and the 1995 Incentive Stock Option Plan; hereinafter sometimes collectively referred to as the "Incentive Option Plans"), concerning an extension of the period within which certain options may be exercised following termination of employment (the "Option Plan Amendments"). At July 31, 1997 and October 31, 1996, the assets of the GTD represented approximately 28% and 30%, respectively, of total Company assets. For the nine months ended July 31, 1997, revenues from the GTD represented approximately 83% of total Company revenues, compared with approximately 90% of total Company revenues for the year ended October 31, 1996. If the Sale is consummated, the Company will receive aggregate cash consideration of $3.5 million, a promissory note in a principal amount presently estimated to be between approximately $2.0 million and $2.2 million, and certain other consideration. See "The Proposed Sale of the Government Technology Division-- The Purchase Agreement, Note and Warrant," below. The total consideration to be received by the Company from the sale is believed by the Company to be approximately $6.9 million (the present value assigned to the consideration by the financial advisor retained by the Special Committee of the Board of Directors for purposes of rendering an opinion with regard to the fairness from a financial point of view, to Base Ten of the Sale; see "The Proposed Sale of the Government Technology Division--Opinion of Financial Advisor to the Special Committee"), which amounts to approximately $0.85 per share of outstanding Common Stock of the Company. The directors of Base Ten have unanimously approved each of the three proposals and recommend a vote in favor of each of the proposals by the shareholders. VOTING AT THE MEETING; RECORD DATE The Board has fixed November 14, 1997, as the record date (the "Record Date") for the determination of shareholders of Base Ten entitled to notice of and to vote at the Meeting. Accordingly, only holders of record of the Company's outstanding Common Stock on the Record Date are entitled to notice of, and to vote at, the Meeting. As of the Record Date, there were 7,643,952 shares of Class A Stock and 445,121 shares of Class B Stock of the Company outstanding and entitled to vote, and such shares were held by approximately 800 holders of record. Each holder of record of shares of Class A Stock on the Record Date is entitled to one-tenth of a vote per share on all matters properly presented at the Meeting. Each holder of record of shares of Class B Stock is entitled to one vote per share on all matters properly presented at the Meeting. The presence, in person or by proxy, of the holders of a majority of the issued and outstanding shares of Common Stock entitled to vote at the Meeting will constitute a quorum. Abstentions will be counted as present in determining whether a quorum exists, but will not be counted as a vote, for or against, the proposal to approve and adopt the Purchase Agreement providing for the Sale. The approval and adoption of the Purchase Agreement providing for the Sale requires the affirmative vote of seventy-five percent (75%) of the votes cast by holders of shares of Common Stock entitled to vote thereon, and, in addition, the affirmative vote of seventy-five percent (75%) of the votes cast by holders of Class B Stock. The proposal relating to the Issuance requires the approval of a majority of the holders of the Company's Class A Stock and Class B Stock voting together as a class. The approval and adoption of the Option Plan Amendments require the affirmative vote of a majority of the holders of the Company's Class A Stock and Class B Stock voting together as a class. Therefore, abstentions and broker non-votes with respect to the second and third proposals will have the same effect as a vote against those proposals. As of November 14, 1997, the Base Ten directors and executive officers and their affiliates as a group held shares representing approximately 18% of the outstanding shares of Class A Stock and 38% of the outstanding shares of Class B Stock. Each of the directors and executive officers of Base Ten who owns shares of Class A Stock or Class B Stock has advised Base Ten that he intends to vote or direct the vote of all such shares over which he has voting control, subject to and consistent with any fiduciary obligations in the case of shares held as a fiduciary, for approval and adoption of the Purchase Agreement providing for the Sale, for approval of the Issuance and for approval and adoption of the Option Amendments. Shares voted against any proposal will not be voted in favor of any adjournment of the Meeting for the purpose of additional solicitation of proxies with respect to that proposal. Under New Jersey law, it is unclear whether shareholders who vote in favor of the Sale are precluded from pursuing litigation opposing the Sale or otherwise challenging it. It is similarly unclear under New Jersey law whether the Company may assert estoppel or other equitable defenses against a shareholder who votes in favor of the proposed Sale and simultaneously, or thereafter, challenges the Sale. However, although management is of the view that shareholders of the Company do not have statutory appraisal rights with respect to the proposed Sale, if it were determined that shareholders have appraisal rights with respect to the Sale, a vote in favor of the Sale would disqualify a shareholder from pursuing those rights. See "Appraisal Rights." SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS The following table sets forth information as of October 31, 1997, with respect to the Class A and Class B Stock beneficially owned, directly or indirectly, by each of the Company's directors, executive officers and all of its directors and executive officers as a group, and by each person who, to the knowledge of the Company, was a beneficial owner of 5% or more of the Class A Stock or Class B Stock.
SHARES PERCENT OF VOTING POWER BENEFICIALLY PERCENT REPRESENTED BY CLASS A NAME AND ADDRESS OWNED(1) OF CLASS AND CLASS B COMBINED(2) - ------------------------------------------ ----------------------- ----------- ----------------------- Myles M. Kranzler (3)(4) Class A - 510,423 6.23% 15.57% Class B - 160,144 35.98 Edward J. Klinsport (3)(4) Class A - 267,886 3.32 2.56 Class B - 7,136 1.59 Alan J. Eisenberg (3)(4) Class A - 235,145 2.93 1.69 Class B - 282 0.06 Richard J. Farrelly (4) Class A - 56,520 0.74% 0.41% Class B - -- -- Frank W. Newdeck (4) Class A - 38,480 0.50 0.31 Class B - -- -- Alexander M. Adelson (4) Class A - 467,916 6.03 3.47 Class B - -- -- David Batten Class A - 28,900 0.37 0.15 Class B - -- -- Alan S. Poole Class A - 20,000 0.26 0.08 Class B - -- -- Jesse L. Upchurch Class A - 2,050,400(5) 24.21 19.42 Class B - 53,500 11.98 Bruce D. Cowen Class A - 686,250 8.42 10.10 Class B - 78,800 17.51 Herzog, Heine, Geduld, Inc. Class A - 28,895 3.80 2.36 Class B - 28,895 6.49 Directors and executive officers as Class A - 1,625,265 17.65 22.78 a group (8 persons) (3)(4) Class B - 167,562 37.23
- ------------------------ (1) Ownership of shares of Class A Stock reflected in the above table includes shares issuable upon (a) conversion of Class B Stock in accordance with the terms thereof (one share of Class A Stock for each share of Class B Stock), (b) exercise of outstanding options and warrants to purchase Class A Stock, (c) conversion of Class B Stock issuable upon exercise of outstanding options to purchase Class B Stock, and (d) conversion of outstanding convertible debentures. Ownership of Class B Stock included in the above table includes shares issuable upon exercise of outstanding options to purchase Class B Stock. (2) Assumes exercise of options and warrants exercisable within 60 days of October 6, 1997, but not the conversion of Class B Stock to Class A Stock. (3) Includes (a) as to Mr. Kranzler, 45,300 shares of Class A Stock and 62,823 shares of Class B Stock owned by his wife, (b) as to Mr. Klinsport, 10 shares of Class A Stock owned by his wife and 11,000 shares of Class A Stock issuable upon exercise of options held by his wife and (c) as to Mr. Eisenberg, 1,700 shares of Class A Stock and 282 shares of Class B Stock owned by his wife and children. (4) Includes as to (a) Mr. Kranzler, 236,000 shares, (b) Mr. Klinsport, 254,686 shares,(c) Mr. Eisenberg, 233,163 shares; (d) Mr. Farrelly, 55,520 shares; (e) Mr. Newdeck, 38,480 shares; (f) Mr. Adelson, 395,500 shares; (g) Mr. Batten, 20,000 shares; (h) Mr. Poole, 20,000 shares; and (i) all directors and executive officers as a group, 1,253,349 and 4,946 shares, of Class A Stock and Class B Stock, respectively, issuable upon the exercise of outstanding options or warrants. (5) Based in part on a Statement on Schedule 13D and a Statement of Changes in Beneficial Ownership on Form 4 filed with the SEC, represents (i) 968,200 shares of Class A Stock held directly by the Estate of Constance Upchurch, of which Mr. Upchurch is the executor and beneficiary (the "Estate"), (ii) 209,900 shares of Class A Stock held by a corporation of which Mr. Upchurch is the sole shareholder, (iii) 18,400 shares of Class A Stock held directly by Mr. Upchurch, (iv) 53,900 shares of Class A Stock issuable upon conversion of the same number of shares of Class B Stock held directly by the Estate, and (v) 800,000 shares of Class A Stock issuable upon conversion of the Company's 9.01% Convertible Subordinated Debentures due August 31, 2003. PROXIES All shares of Common Stock that are entitled to vote and are represented at the Meeting by properly executed proxies received by the Company prior to or at the Meeting, and not revoked, will be voted at the Meeting in accordance with the instructions indicated on such proxies. IN THE ABSENCE OF SUCH INSTRUCTIONS, THE SHARES WILL BE VOTED "FOR" APPROVAL AND ADOPTION OF THE PURCHASE AGREEMENT PROVIDING FOR THE SALE; "FOR" APPROVAL OF THE ISSUANCE; AND "FOR" APPROVAL AND ADOPTION OF THE OPTION PLAN AMENDMENTS. If any other matters are properly presented at the Meeting for consideration, including, among other things, consideration of a motion to adjourn the Meeting to another time and/or place (including, without limitation, for the purpose of soliciting additional proxies), the persons named in the enclosed form of proxy and acting thereunder will have discretion to vote on such matters in accordance with their best judgment. A properly executed proxy marked "ABSTAIN," although counted for purposes of determining whether there is a quorum present at the Meeting, will not be voted. SINCE THE REQUIRED VOTE OF HOLDERS OF COMMON STOCK WITH RESPECT TO THE SECOND AND THIRD PROPOSALS IS BASED UPON THE NUMBER OF OUTSTANDING SHARES OF COMMON STOCK, RATHER THAN UPON THE SHARES ACTUALLY VOTED, THE FAILURE BY THE HOLDER OF ANY SUCH SECURITIES TO SUBMIT A PROXY OR TO VOTE IN PERSON AT THE MEETING (INCLUDING ABSTENTIONS) WILL HAVE THE SAME EFFECT AS A VOTE AGAINST APPROVAL OF THE ISSUANCE AND AGAINST APPROVAL AND ADOPTION OF THE OPTION PLAN AMENDMENTS. The accompanying form of proxy is being solicited on behalf of the Board of Directors of the Company. All expenses of this solicitation, including the cost of preparing and mailing this Proxy Statement, will be borne by the Company. In addition to the mailing of the proxy material, such solicitation may be made in person or by telephone by directors, officers and employees of the Company, who will receive no additional compensation therefor. The Company has retained Innisfree M&A Incorporated, a proxy solicitation firm, to assist with the solicitation at customary rates, plus reimbursement of out-of-pocket expenses. Upon request, the Company will reimburse brokers, dealers, banks and trustees, or their nominees, for reasonable expenses incurred by them in forwarding material to beneficial owners of shares of Common Stock of the Company. Any proxy may be revoked at any time prior to its exercise by notifying the Secretary in writing, by delivering a duly executed proxy bearing a later date or by attending the Meeting and voting in person. EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS PROXY STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS OR OUTCOMES TO BE MATERIALLY DIFFERENT FROM THOSE ANTICIPATED AND DISCUSSED HEREIN. IMPORTANT FACTORS THAT THE COMPANY BELIEVES MIGHT CAUSE SUCH DIFFERENCES ARE DISCUSSED IN THE CAUTIONARY STATEMENTS ACCOMPANYING THE FORWARD-LOOKING STATEMENTS IN THIS PROXY STATEMENT AND IN THE RISK FACTORS DETAILED IN THE COMPANY'S PREVIOUS FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC"). IN ASSESSING FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, READERS ARE URGED TO READ CAREFULLY ALL CAUTIONARY STATEMENTS CONTAINED IN THIS PROXY STATEMENT AND IN THOSE OTHER FILINGS WITH THE SEC. THE PROPOSED SALE OF THE GOVERNMENT TECHNOLOGY DIVISION (PROPOSAL 1) THE MATERIAL ASPECTS OF THIS PROPOSAL ARE SUMMARIZED BELOW. THIS SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPLETE TEXT OF THE ASSET PURCHASE AGREEMENT, A COPY OF WHICH IS ON FILE IN THE OFFICES OF THE CORPORATION, AND WHICH IS ALSO AN EXHIBIT TO THE COMPANY'S CURRENT REPORT ON FORM 8-K FILED WITH THE SEC ON NOVEMBER 12, 1997. THE SEC MAINTAINS A WEB SITE THAT CONTAINS REPORTS, PROXY AND INFORMATION STATEMENTS AND OTHER INFORMATION REGARDING COMPANIES THAT FILE ELECTRONICALLY WITH THE SEC, INCLUDING THE COMPANY, AND THE ADDRESS IS (http://www.sec.gov). SHAREHOLDERS ARE ALSO URGED TO READ THE EXHIBITS TO THIS PROXY STATEMENT IN THEIR ENTIRETY. OVERVIEW The Company and Strategic Technology Systems, Inc., a recently organized Nevada corporation (the "Purchaser") which is to be managed and partially owned by certain members of the Company's senior management who have been over time, and are currently, significantly involved in the business and development of its Government Technology Division (the "GTD"), have entered into an Asset Purchase Agreement, dated as of October 27, 1997 (the "Purchase Agreement") pursuant to which the Purchaser will acquire substantially all of the operating assets of the GTD in exchange for the consideration and the assumption of certain liabilities as set forth below (the "Sale"). At July 31, 1997, the assets of the GTD represented approximately 28% of total Company assets. For the nine months ended July 31, 1997, revenues from the GTD represented approximately 83% of total Company revenues, compared with approximately 90% of total Company revenues for the year ended October 31, 1996. If the Sale is consummated, the Company will receive aggregate cash consideration of $3.5 million, a promissory note in a principal amount presently estimated to be between approximately $2.0 million and $2.2 million, and certain other consideration. See "The Purchase Agreement, Note and Warrant," below. At the Meeting, the shareholders will be asked to approve and adopt the Purchase Agreement providing for the Sale. BACKGROUND As part of a strategic planning process begun in 1990, the Company commenced applying its technological expertise in safety-critical applications, which was derived from its historical focus on designing electronic systems used primarily in weapons management systems for military aircraft, to a broader array of uses. This effort was in part the result of a recognition by management that the end of the "cold war" and declines in U.S. and NATO military spending required the Company to develop commercial lines of business. As the Company pursued its chosen area of commercial product development, the development of software solutions for the pharmaceutical and medical device manufacturing industries, it became evident to management that the differing development, marketing, sale and manufacturing needs of the commercial sector required a separate division within the Company. The Company therefore established the Medical Technology Division ("MTD") to pursue its commercial product developments while continuing its historical defense-related products manufacturing operations and its general corporate overhead and administration as part of the GTD. The reduction in defense-related revenues and increasing price competitiveness encountered in connection with the bid process as the defense industry consolidated in the early 1990's resulted in a reduction in Company revenues, the incurrence of operating losses, and the need to fund those operating losses. The adverse effects of these factors were increased as a result of the operating losses incurred by the MTD as its product development and initial marketing efforts were pursued. Consideration was given to the possibility of a "spin-off" of the GTD in the form of a distribution to shareholders. This alternative had been considered as early as 1994, when it was abandoned because efforts to obtain a ruling from the Internal Revenue Service as to the tax-free nature of such a transaction were unsuccessful. The Company believed it would achieve the same result in 1997, and therefore did not pursue this alternative. The only other alternatives considered by the Company were the continuance of its business in substantially the same form as is currently the case or the dissolution of the GTD, neither of which were as attractive as the proposed Sale. In June 1997, during the course of a meeting of the Company's Board of Directors, the possibility of a sale of the GTD was discussed. Thereafter, in late June 1997, the Company's Chief Financial Officer, Mr. Edward J. Klinsport, who was also President of the GTD, indicated to the Company's Chief Executive Officer, Mr. Myles M. Kranzler, that a group led by Mr. Klinsport and including certain other senior management personnel of the GTD (the "Management Group") was contemplating extending an offer to purchase the GTD. At a special meeting of the Company's Board of Directors on August 4, 1997, after discussion of the future prospects of the GTD as well as consideration of the MTD's current product and marketing efforts and future capital needs and the likely benefits of a sale of the GTD, the directors authorized the Company to pursue efforts to sell the GTD on terms that reflected fair value, and to do so in an expeditious manner so as to minimize disruption to the Company, its employees and customers. In view of the prospects of a bid from the Management Group and the significance of the GTD's revenues and operations to the Company as a whole, the directors determined to establish a Special Committee, consisting of Messrs. David Batten and Alan J. Eisenberg, to pursue the sale of the GTD, and in furtherance of that goal, to retain special legal counsel and to engage an outside investment banking firm for the purpose of advising on the sale of the GTD and rendering an opinion as to the fairness of the financial terms of any proposed sale, respectively. Mr. Eisenberg has been employed by the Company since 1980 and became President of the MTD in 1994. He has been a Vice President of the Company since 1983 and is responsible for the Company's software activities. Mr. Eisenberg has been a director of the Company since 1992. Mr. Batten has been a director of the Company since May 1997. From 1968 to 1990, Mr. Batten was employed with The First Boston Corporation ("First Boston"), and was a Managing Director of that firm from 1977 to 1990, executive director of Credit Suisse First Boston (London) from 1986 to 1988, head of First Boston's capital markets division from 1979 to 1986, and a member of that firm's management committee from 1981 to 1990. From 1990 to 1992, Mr. Batten was a general partner with The Blackstone Group, in charge of partnership capital and new business, and from 1992 to 1994 Mr. Batten was a general partner of Lazard Freres & Co., in charge of capital markets. Since 1994 Mr. Batten has been a private investor in venture capital investments in start-up and early-stage companies. In selecting Messrs. Batten and Eisenberg for the Special Committee, the directors determined that Messrs. Batten and Eisenberg had the appropriate background knowledge and experience for the task that was presented, including a substantial base of information concerning all aspects of the GTD's operations and, in the case of Mr. Batten, a background in investment banking and business valuation, and that neither of them had any material potential conflicts of interest in evaluating a Management Group bid, inasmuch as neither was an employee of the GTD, was associated with the Management Group bid, or was otherwise potentially related to the Sale transaction, whereas the other directors who were not members of the Management Group had potential conflicts of interest, including fee arrangements. Mr. Alan S. Poole, a non-officer director, was then contemplating investing in the Purchaser (he subsequently determined not to do so) and Mr. Alex A. Adelson was originally to receive a success fee in connection with the Sale. Following the August 4th Board meeting, the Special Committee retained and conferred with Battle Fowler LLP, its special legal counsel, which had not previously acted as counsel to the Company or the Management Group. Subsequently, Battle Fowler LLP has served as counsel to the Company in connection with the transaction described under the caption "The Proposed Issuance" (Proposal 2) in this Proxy Statement. Battle Fowler LLP does not serve as the Company's counsel generally, at this time, and the Company retains various counsel to assist its various needs for legal services. Battle Fowler LLP does not represent the Management Group (one of whose members is an executive officer and director of the Company) or any individual member thereof. Battle Fowler LLP has advised the Company that, in view of the foregoing, it does not consider its representation of the Special Committee in connection with the Sale and its representation of the Company in connection with the transaction described under the caption "The Proposed Issuance" to represent a conflict of interest. The Special Committee also met with Cowen & Company ("Cowen"), which had recently been retained by the Base Ten Board as the Company's financial advisor, and retained Cowen as the Special Committee's financial advisor in connection with the possible sale of the GTD. The Special Committee was authorized to select any financial advisor, but engaged Cowen after consideration of Cowen's credentials (which are described in the third paragraph under "Opinion of Financial Adviser to the Special Committee," below), and determining that Cowen's engagement by the Company did not present any material potential conflicts of interest. Based on its review of Cowen's credentials, the Special Committee did not believe it necessary to consider or interview other financial advisors, and did not do so. During August, detailed due diligence information regarding the GTD was delivered to The Edo Corporation ("Edo"), a third-party defense contractor that had, earlier in the summer of 1997, indicated tentative interest in (but had not pursued) a possible acquisition of the GTD. The Special Committee, with the advice of its special counsel and Cowen, determined that an auction of the GTD should not be pursued because of the risk of an adverse effect on the GTD's business and prospects that was believed by the Special Committee to be likely if that path were undertaken, and in particular the risks that key employees would defect during an extended auction process, that such a procedure and attendant public disclosure would allow competitors to disparage the GTD as unstable, that potential customers would delay any future contract awards during the pendency of an auction, and that the process would thereby interfere with bids on new or additional contracts. The Special Committee also took into consideration a statement by Edo that it would not participate in an auction process. Consequently, the Special Committee determined that it was prudent to limit solicitation to the Management Group and to Edo, thereby assuring the possibility of at least two competing bids. In view of its business, as well as its earlier indication of interest, Edo was believed by the Special Committee to be a logical potential bidder. The Management Group also objected to an auction process, based on an assessment of the same risks as those considered by the Special Committee. At the same time, the Company's management considered what minimum requirements as regards (i) continued occupancy by the GTD of the existing facilities in Trenton and (ii) transitional accounting, personnel and other services would be necessary in order to permit the Company to conduct operations following a sale with minimal disruption. In addition, the Company's management considered employee morale and reaction to a sale, and reached an initial determination during this period that in order to retain valued employees of both the GTD and the MTD during the sale process and to encourage certain GTD employees to agree to be employed by a buyer of the GTD, it would be in the best interests of the Company and its shareholders to extend the exercise period of certain employees' incentive stock options granted under four Base Ten stock option plans for a two-year period following any termination of employment, even if voluntary. See "The Option Plan Amendments," below, for a more complete description of the proposed amendments effecting such extensions and the consequences thereof. If those amendments are approved, the exercise period of incentive stock options held by certain members of the Management Group (but not Mr. Klinsport's) will be extended for a two-year period following the Sale. In late August 1997, a formal letter soliciting proposals for the purchase of the assets and liabilities of the GTD was issued by Cowen to the Management Group and to Edo, requesting that preliminary proposals containing their indications of interest be submitted by September 8, 1997. The date for response was subsequently extended to September 15th at the request of Edo. For the reasons described above, no other parties were solicited to submit proposals to purchase the GTD. On September 15th, Cowen received the Management Group's proposal and Edo's tentative bid. The Management Group's bid included (i) an aggregate purchase price equal to the net asset value of the GTD, plus $400,000 (estimated to be between $5 and $6 million), of which $3.5 million would be payable in cash, and the balance in the form of a five-year note, (ii) a contingent payment of $400,000 if certain orders were received by the GTD, (iii) an agreement to sub-lease the existing GTD facilities for three years, and (iv) a three-month transitional arrangement for certain services. Edo's tentative offer was for a purchase price of between $4 million and $5 million, with the form of consideration unspecified, but expected to be all cash, and a one-year sub-lease arrangement. The Special Committee was advised by Cowen that the present value of the Management Group's bid exceeded the upper limit of Edo's tentative bid. Edo also declined to increase its bid when offered the opportunity to do so by Cowen. Upon analysis of the financial terms and of the provisions of each proposal, the Special Committee concluded that the Management Group's proposal offered higher value to the Company and was therefore preferable from a financial point of view. In addition, the Management Group's offer was not subject to further due diligence while Edo conditioned its offer on the results of further due diligence and investigation, which would have required additional time to conclude and for which Edo did not establish a firm timetable. It was further noted that in addition to a higher purchase price, the Management Group's offer included a provision for occupancy of the Company's premises for the three year minimum period sought by the Company compared to one year for Edo, thereby providing the Company with the benefits of three years' rental income. Based on the foregoing, the Special Committee, after consultation with other Base Ten Board members who were not affiliated with the Management Group, determined to pursue the Management Group's offer. The Special Committee also concluded, however, that although the Management Group's initial proposal met most of the Company's basic financial and structural requirements, certain aspects required further negotiation. In particular, the Special Committee came to the view that it would be appropriate for Base Ten to retain an equity interest in the GTD or acquire an equity interest in the Purchaser so as to afford Base Ten the opportunity to benefit if the GTD were to achieve a substantial increase in its business in the future, particularly in view of the Management Group's request that a portion of the purchase price be in the form of a promissory note. In addition, a break-up fee of $850,000 requested by the Management Group was viewed as excessive in amount. The Special Committee and Cowen therefore met with representatives of the Management Group on September 19th and proposed that Base Ten retain a 19.9% minority interest in the GTD, and that the break-up fee be reduced to 3% of the aggregate purchase price paid. The representatives of the Management Group accepted a reduction in the break-up fee but rejected the proposal for Base Ten to retain an equity interest in the GTD, and the discussions were suspended. Further conversations ensued over the next two days between Base Ten's Vice-Chairman, Mr. Alexander Adelson, and representatives of the Management Group, but no agreement was reached. A special meeting of the Base Ten Board was convened on Monday, September 22nd, with a representative of Battle Fowler LLP present, and all Board members were briefed on the status of the negotiations. After extensive deliberations (with Mr. Klinsport absent), including a presentation by Mr. Kranzler regarding the likelihood of continued operating losses by the GTD and the possible adverse effects on the Company and the GTD if a sale were not concluded expeditiously, followed by negotiations with representatives of the Management Group, a compromise was reached in which it was proposed that Base Ten receive, as additional consideration, a warrant to purchase common stock of the Purchaser on the terms described below (the "Warrant"). Cowen did not participate in any of the foregoing meetings or negotiations (other than the meeting on September 15th) because its services with respect thereto were not deemed necessary and it was believed that its independence and objectivity could be better maintained by its not participating as a negotiator on behalf of any party. Nor did Cowen "approve" the price or other terms of the Sale; its services were limited to rendering the fairness opinion described elsewhere in this Proxy Statement. Special counsel was asked to participate in the meetings, however, solely to enable it to explore and advise on legal issues and to properly prepare any agreements that were reached. Further negotiations continued throughout mid-October on these and other issues while an initial draft of a definitive purchase agreement was prepared and negotiated. During the course of those negotiations, the Purchaser agreed to increase the term of the sublease to five years. At a meeting of Base Ten's Board on October 13, 1997, the Base Ten Board unanimously approved the Sale, subject to receipt of a favorable opinion from Cowen and final review and approval by the Special Committee and subject to shareholder approval, authorized the execution and delivery of a definitive purchase agreement providing for the Sale, and authorized filing of preliminary proxy solicitation materials seeking shareholder approval and adoption of the Purchase Agreement providing for the Sale. At a meeting of the Special Meeting on October 16, 1997, Cowen delivered its preliminary oral opinion to the Special Committee, and the Special Committee thereafter completed its final review and approved the Sale. The definitive Purchase Agreement was signed on October 27, 1997, on which date Cowen delivered its written opinion to the Special Committee described below, and Base Ten publicly announced that its Board of Directors had approved the Sale and had entered into a definitive agreement. RECOMMENDATION OF THE BASE TEN BOARD AND BASE TEN'S REASONS FOR THE SALE In considering the Sale, Base Ten shareholders are urged to read in its entirety the discussion under the caption "Interests of Certain Persons in the Sale; Conflicts of Interest" in this Proxy Statement. The Board of Directors of Base Ten believes that the terms of the Sale are fair to, and in the best interests of, Base Ten and its shareholders. Accordingly, the Board of Directors of Base Ten has unanimously approved the Sale and unanimously recommends the approval and adoption of the Purchase Agreement providing for the Sale by Base Ten shareholders. In reaching its conclusions, the Base Ten Board considered a number of factors, including the following which it considered to be material: (i) information concerning the financial performance, condition, business operations and prospects of each of the Company as a whole, and each of the GTD and the MTD, viewed separately; (ii) anticipated limitations on future growth of GTD revenues, the prospects for continuing losses, and the need for substantial cash resources to fund those losses; (iii) the benefits that could reasonably be expected to be realized by Base Ten from the Sale, which are described in the three immediately following paragraphs; (iv) the financial and other terms and structure of the Sale, including the fact that the Purchaser would sub-lease a substantial portion of the Trenton facilities for a five-year period; and (v) the opinion of Cowen, to the Special Committee described below, that the proposed Sale was fair to Base Ten from a financial point of view. The Base Ten Board regarded the first four of the aforementioned factors as primarily supporting its conclusion that the terms of the Sale are in the best interests of Base Ten and its shareholders, the last of the aforementioned factors as primarily supporting its conclusion that the terms of the Sale are fair to Base Ten and its shareholders, and the fourth of the aforementioned factors as also supporting its conclusion as to fairness because of the inclusion in the terms and structure of the Sale of a contingent future interest in the Purchaser, a five-year sublease and a transitional service agreement. A prime motivation for the Sale was a concern that the GTD's recent past losses would continue with no foreseeable opportunities for significant sales growth in the future. In addition, the Board was concerned that the Company's previously declared focus on the MTD, and lower level of investment in new GTD products, had created low morale among GTD personnel, with a consequent risk of significant loss of senior and key technical and engineering personnel. In the Board's opinion, significant personnel losses would have left the Company unable to meet its contractual commitments, and could have resulted in further, and large, losses. A factor which weighed against the Sale was the possibility of a significant upturn in GTD defense business. However, the Board viewed this possibility as unlikely and, to date, no new significant orders have been booked by the GTD since the execution of the Purchase Agreement. In addition, the Board, in order to retain a limited participation in the results of any such upturn, negotiated a contingent future interest in the Purchaser as part of the terms of the Sale. It did so in the form of (i) a contingent $400,000 payment dependent on the Purchaser receiving certain orders from Daimler Benz Aerospace for the Tornado Stores Management System (See "The Government Technology Division--Products and Programs--Tornado Program"), (ii) the Warrant, and (iii) a right to receive 15% of the gross proceeds of a sale of the Purchaser prior to its initial public offering. See "The Purchase Agreement, Note and Warrant", below. One factor which weighed against the Sale was the possibility of future GTD revenue growth from commercial applications. A possible adverse consequence of the Sale was the risk that the Company would be losing a source of cash flow to fund MTD operations. Another factor which weighed against the Sale was the assumption by the Company, through its acceptance of a Purchaser note as part payment of the purchase price, of some of the risk that the Purchaser would not succeed as a stand-alone entity. Base Ten believes that the Sale offers it an opportunity to focus its management and financial resources on the MTD, and to enhance its marketing and sales efforts to address the potential market for its global Computerized Manufacturing Execution Systems ("MES"). In reviewing the reasons for the Sale, the Base Ten Board noted that the Sale would provide $3.5 million in immediate cash resources to the Company, as well as a limited opportunity (through the Warrant and other contingent future interests in the Purchaser) for participating in any future growth of the GTD business without continuing to fund the operating losses of the GTD business, and for continued occupancy of the leased GTD Trenton facilities by the Purchaser for a five-year period. Management also noted the likely benefits of having the financial community and investors presented with a company focused on a single industry segment that is associated with possible prospects for a relatively high rate of growth. The foregoing discussion of the information and all the material factors considered and given weight by the Base Ten Board is not intended to be exhaustive. In reaching the determination to approve and recommend the Sale, the Base Ten Board did not assign any relative or specific weights to the foregoing factors and individual directors may have given differing weights to different factors. The Base Ten Board is, however, unanimous in its recommendation to the holders of Base Ten Common Stock that the Purchase Agreement providing for the Sale be approved and adopted. THE BASE TEN BOARD UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF BASE TEN COMMON STOCK VOTE "FOR" THE APPROVAL AND ADOPTION OF THE PURCHASE AGREEMENT PROVIDING FOR THE SALE. OPINION OF FINANCIAL ADVISOR TO THE SPECIAL COMMITTEE Cowen has acted as financial advisor to the Special Committee in connection with the Sale. Pursuant to an engagement letter dated August 27, 1997 (the "Cowen Engagement Letter"), Base Ten retained Cowen to serve as the financial advisor to the Special Committee with respect to the Sale. As part of this assignment, Cowen was asked to render an opinion to the Special Committee as to the fairness, from a financial point of view, to Base Ten of the financial terms of the Sale pursuant to the Purchase Agreement. On October 16, 1997 Cowen delivered certain of its written analysis and a preliminary oral opinion to the Special Committee to the effect that, as of such date, the financial terms of the Sale pursuant to the Purchase Agreement were fair, from a financial point of view, to Base Ten. THE FULL TEXT OF THE WRITTEN OPINION OF COWEN, DATED OCTOBER 27, 1997, IS ATTACHED HERETO AS EXHIBIT A AND IS INCORPORATED BY REFERENCE. HOLDERS OF COMPANY COMMON STOCK ARE URGED TO READ THE OPINION IN ITS ENTIRETY FOR THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY COWEN. THIS SUMMARY OF THE WRITTEN OPINION OF COWEN SET FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. COWEN'S ANALYSIS AND OPINION WERE PREPARED FOR AND ADDRESSED TO THE SPECIAL COMMITTEE AND ARE DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE FINANCIAL TERMS OF THE SALE PURSUANT TO THE PURCHASE AND DO NOT CONSTITUTE AN OPINION AS TO THE MERITS OF THE SALE CONTEMPLATED BY THE PURCHASE AGREEMENT OR A RECOMMENDATION TO ANY HOLDERS OF BASE TEN COMMON STOCK AS TO HOW TO VOTE AT THE MEETING. Cowen was selected by Base Ten as the financial advisor to the Special Committee, and to render an opinion to the Special Committee, because Cowen is a nationally recognized investment banking firm and because the principals of Cowen have substantial experience in transactions similar to the Sale and are familiar with Base Ten and its businesses. As part of its investment banking business, Cowen is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions and valuations for corporate and other purposes. Cowen and its affiliates are providing financing services for the Company and will receive customary fees for rendering such services. In addition, in the ordinary course of its business, Cowen and its affiliates trade the equity securities of Base Ten for their own account and for the accounts of their customers, and accordingly, may at any time hold a long or short position in such securities. In arriving at its opinion, Cowen (a) reviewed the Agreement; (b) reviewed the Company's consolidated financial statements for the nine months ended July 31, 1997 and the fiscal years ended October 31, 1996, 1995 and 1994, certain publicly available filings with the Securities and Exchange Commission and certain other relevant financial and operating data of the Company; (c) reviewed GTD's financial statements as prepared by management of the Company for the nine months ended July 31, 1997 and the fiscal years ended October 31, 1996 and 1995 and certain other relevant financial and operating data of GTD; (d) held meetings and discussions with management and senior personnel of the Company to discuss the business, operations, historical financial results and future prospects of GTD; (e) reviewed financial projections furnished to us by the management of the Company, including among other things, the capital structure, sales, net income, cash flow, capital requirements and other data of GTD we deemed relevant; (f) reviewed the historical prices of the Class A and Class B common stock of the Company from October 13, 1996 to October 13, 1997 and compared those trading histories with those of market indices which we deemed relevant; (g) reviewed the valuation of GTD in comparison to other similar publicly traded companies; (h) compared the financial terms, to the extent publicly available, of the Transaction to selected business transactions deemed to be comparable in whole or in part; (i) conducted a discounted cash flow analysis of GTD based on financial projections provided to us by management of the Company; (j) analyzed potential pro forma financial effects of the Transaction contemplated by the Agreement; and (k) conducted such other studies, analysis, inquiries and investigations as we deemed appropriate. All of the significant financial analyses performed by Cowen in arriving at its opinion are summarized below. See "--Analysis of Certain Public Traded Companies"; "--Analysis of Certain Transactions"; "--Discounted Cash Flow Analysis"; "--Pro Forma Analysis" and "--Stock Trading History." Cowen also considered the estimated potential value based on management's estimates of the Daimler Benz contract in rendering its opinion. See "The Purchase Agreement, Note and Warrant." At the request of the Company, Cowen, on behalf of the Special Committee, solicited an indication of interest to acquire substantially all of the assets of GTD from a third party. See "Background." In rendering its opinion, Cowen relied upon the Company's management with respect to the accuracy and completeness of the financial and other information furnished to Cowen as described above. Cowen assumed that financial forecasts, projections and estimates reflected the best currently available estimates and judgments of the Company's management as to the expected future financial performance of GTD. Cowen has not assumed any responsibility for independent verification of such information, including financial information, nor has Cowen made an independent evaluation or appraisal of any of the properties or assets of GTD. With respect to all legal matters relating to the Company and Buyer, Cowen has relied on the advice of legal counsel to the Company. The opinion of Cowen is necessarily based on general economic, market financial and other conditions as they exist on, and can be evaluated as of, the date hereof, as well as the information currently available to Cowen. It should be understood that, although subsequent developments may affect Cowen's opinion, Cowen does not have any obligation to update, revise or reaffirm its opinion. Cowen's opinion does not constitute a recommendation to any stockholder as to how such stockholder should vote on the proposed Sale. The Cowen opinion does not imply any conclusion as to the likely trading range for the common stock of the Company following consummation of the Sale or otherwise, which may vary depending on numerous factors that generally influence the price of securities. Cowen's opinion is limited to the fairness, from a financial point of view, of the terms of the Sale. Cowen expresses no opinion with respect to any other reasons, legal, business or otherwise, that may support the decision of the Special Committee to approve, or the Company's decision to consummate, the Sale. For purposes of rendering its opinion Cowen has assumed in all respects material to the analysis, that the representations and warranties of each party contained in the Agreement are true and correct, that each party will perform all of the covenants and agreements required to be performed by it under the Agreement and that all conditions to the consummation of the Transaction will be satisfied without waiver thereof. Cowen has also assumed that all governmental, regulatory or other consents and approvals contemplated by the Agreement will be obtained and that in the course of obtaining any of those consents no restrictions will be imposed or waivers made that would have an adverse effect on the contemplated benefits of the Sale. The following is a summary of all of the significant financial analyses performed by Cowen to arrive at its opinion. Cowen performed certain procedures, including each of the financial analyses described below, and reviewed with the management of Base Ten the assumptions on which such analyses were based and other factors, including the historical and projected financial results of the GTD. No limitations were imposed by the Special Committee with respect to the investigations made or procedures followed by Cowen in rendering its opinion. ANALYSIS OF CERTAIN PUBLICLY TRADED COMPANIES. To provide contextual data and comparative market information, Cowen compared selected historical operating and financial ratios for GTD to the corresponding data and ratios of certain other companies (the "Selected Companies") whose securities are publicly traded and which Cowen believes have operating, market valuation and trading valuations similar to what might be expected of the GTD. These companies included: Boonton Electronics Corp., Industrial Technologies Inc., Lifschultz Industries Inc., Novitron International Inc. and Scientific Industries Inc. Such data and ratios include the Enterprise Value of such Selected Companies as multiples of revenues for the LTM period and the market capitalization of common stock of such Selected Companies as a multiple of the book value of common shareholders' equity. Such analysis indicated that, for the Selected Companies, (i) the median values of Enterprise Value as a multiple of LTM revenue was .2 times and (ii) the median of market capitalization of common stock as a multiple of the book value of common shareholders' equity was .8 times. The corresponding multiples of LTM revenues for the GTD implied by the Purchaser's offer is .5 times. The corresponding multiple of market capitalization of common stock as a multiple of the book value of common shareholders' equity for the GTD implied by the Purchaser's offer is 1.3 times. Although the Selected Companies were used for comparison purposes, none of such companies is directly comparable to the GTD. Accordingly, an analysis of the results of such a comparison is not purely mathematical but instead involves complex considerations and judgments concerning differences in financial and operating characteristics of the Selected Companies and other factors that could affect the trading value of the Selected Companies or the GTD to which they are being compared. In addition, Cowen also compared selected historical operating and financial ratios for the GTD to the corresponding data and ratios of certain publicly traded companies in the defense industry. Cowen, however, found these defense industry companies not comparable to the GTD based on their relative size and revenue and profitability characteristrics. ANALYSIS OF CERTAIN TRANSACTIONS. Cowen reviewed the financial terms, to the extent publicly available, of seven selected transactions (collectively, the "Selected Transaction Types") which Cowen deemed relevant, based on the size of the transactions and revenue and profitability characteristics of the acquired companies, involving the acquisition of micro capitalization general manufacturing companies, which were announced or completed since January 13, 1995. The transactions include, in reverse chronological order, the acquisitions of: NetFrame Systems, Inc. by Micron Electronics, Inc.; David White, Inc. by Choucroute Partners; MDT Corp. by Getinge Acquisition Corp; ASCOR, Inc. by Giga-Tronics, Inc.; International Jensen, Inc. by Recoton Corp.; IDC Systems Inc. by Hi-Rise Recycling Systems, Inc.; and Community Health Computing Corporation by ADAC Laboratories. Cowen reviewed the market capitalization of common stock plus total debt less cash and equivalents ("Enterprise Value") paid in the Selected Transactions as a multiple of latest reported twelve month ("LTM") revenues, and examined the multiples of equity value paid in the Selected Transactions to book value. Such analyses indicated that, (i) on the basis of the Enterprise Value paid, the Selected Transactions had a median valuation of .5 times LTM revenues and (ii) on the basis of equity value paid, the Selected Transactions had a median valuation of 1.1 times book value. The corresponding multiple of LTM revenues implied by the Purchaser's offer is .5 times. The corresponding multiple of LTM book value implied by the Purchaser's offer is 1.3 times. Although the Selected Transactions were used for comparison purposes, none of such transactions is directly comparable to the Transaction, and none of the companies in such transactions are directly comparable to the GTD. Accordingly, an analysis of the results of such a comparison is not purely mathematical but instead involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies involved and other factors that could affect the acquisition value of such companies or the GTD to which they are being compared. In addition, Cowen also reviewed the financial terms, to the extent publicly available, of certain selected transactions in the defense industry. Cowen, however, found the acquired companies in these transactions not comparable to the GTD based on their relative size and revenue and profitability characteristics. DISCOUNTED CASH FLOW ANALYSIS. Cowen estimated the range of values for the GTD based upon the discounted present value of the projected after-tax free cash flows of the GTD for the fiscal years ended October 31, 1997 through 2001, and of the terminal value of the GTD at October 31, 2001, based upon perpetual growth rates of the GTD's revenue. After-tax cash flow was calculated by taking projected EBIT and subtracting from such amount projected taxes, capital expenditures, changes in non-cash working capital and changes in other assets and liabilities and adding projected and historical depreciation and amortization. This analysis was based upon certain assumptions described by, projections supplied by and discussions held with the management of Base Ten. See "Certain Projected Financial Information," below. In performing this analysis, Cowen utilized discount rates ranging from 15% to 25%, which were selected based on the estimated industry weighted average cost of capital including a private market liquidity premium. Utilizing this methodology, GTD's value ranged from $2.5 million to $11.9 million. The aggregate consideration implied by the Purchaser's offer of $6.9 million is in the midrange of these values. PRO FORMA ANALYSIS. Cowen reviewed the projected income statements for the fiscal years ended 1997 and 1998 of Base Ten including the operations of the GTD and of Base Ten pro forma the Sale which excluded the operations of the GTD. Such analysis indicated that Base Ten pro forma the Sale which excluded the operating results of the GTD would have higher revenue growth rates in 1998 over 1997 and higher operating margins in 1998 than Base Ten including the GTD. Cowen also reviewed the pro forma balance sheet effects as of July 31, 1997 which indicated that the ratio of total debt to total book capitalization for Base Ten including the GTD was 77% as compared with 78% for Base Ten pro forma the Sale excluding the GTD. STOCK TRADING HISTORY. Cowen reviewed the historical market prices and trading volumes of Base Ten Class A and Class B Common Stock from October 13, 1996 to October 13, 1997. Cowen also compared Base Ten's closing stock prices with the NASDAQ Composite and Russell 2000 indices. This information was presented solely to provide the Special Committee with background information regarding the stock prices of Base Ten over the period indicated. Cowen noted that over the indicated periods the high and low prices for shares of Base Ten Class A Common Stock were $12.25 and $9.63, respectively, and the high and low prices of Base Ten Class B Common Stock were $14.75 and $10.50, respectively, and that the average daily trading volume of Base Ten's Class A and Class B shares traded were approximately 39,441 and 204, respectively. During the indicated period, Base Ten's stock prices underperformed the NASDAQ Composite and Russell 2000 indices. The summary set forth above does not purport to be a complete description of the analyses performed by Cowen. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant methods of financial analyses and the application of these methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to partial analysis or summary description. Cowen did not attribute any particular weight to any analyses or factor considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, notwithstanding the separate factors summarized above, Cowen believes, and has advised the Special Committee, that its analyses must be considered as a whole and that selecting portions of its analyses and the factors considered by it, without considering all analyses and factors, could create an incomplete view of the process underlying its opinion. In performing its analyses, Cowen made numerous assumptions with respect to industry performance, business and economic conditions and other matters, many of which are beyond the control of Base Ten. These analyses performed by Cowen are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analyses. In addition, analyses relating to the value of businesses do not purport to be appraisals or to reflect the prices at which businesses or securities may actually be sold. Accordingly, such analyses and estimates are inherently uncertain and, though considered reasonable by Base Ten, are subject to significant business, economic, competitive, regulatory and other uncertainties and contingencies all of which are difficult or impossible to predict and many of which are beyond the control of Base Ten. As mentioned above, the analyses supplied by Cowen and its opinion were among several factors taken into consideration by the Special Committee in making its decision to approve the Sale and should not be considered as determinative of such decision. Pursuant to the Cowen Engagement Letter, Base Ten has agreed to pay Cowen $300,000 for its financial advisory services provided in connection with the Sale. Additionally, Base Ten has agreed to reimburse Cowen for its out-of-pocket expenses (including the reasonable fees and expenses of its counsel) incurred or accrued during the period of, and in connection with Cowen's engagement. Base Ten has also agreed to indemnify Cowen against certain liabilities, including liabilities under the federal securities laws, relating to or arising out of services performed by Cowen as financial advisor to the Special Committee in connection with the Sale, unless it is finally judicially determined that such liabilities arose out of Cowen's gross negligence or willful misconduct. The terms of the fee arrangement with Cowen, which are customary in transactions of this nature, were negotiated at arm's length between Base Ten and Cowen, and the Special Committee was aware of such arrangement. Cowen has consented to the use of its name and description of its opinion in this Proxy Statement. In addition, in July 1997, Cowen was retained to provide various financial advisory and investment banking services to Base Ten in connection with the transaction that relates to the Issuance, which is described separately elsewhere in this Proxy Statement (see "The Proposed Issuance Overview"), for which it received $432,216, and five-year warrants to purchase 43,983 shares of Common Stock, exercisable at $15.625 per share. The Special Committee was aware of the terms of such fee arrangement, which were customary for transactions of such nature. CERTAIN PROJECTED FINANCIAL INFORMATION The following projections were prepared by the Company's management in August 1997, and were furnished to Cowen in connection with Cowen's analysis of the proposed Sale and the preparation of a fairness opinion to the Special Committee as to whether or not the proposed Sale is fair to the Company from a financial point of view. The members of the Company's management and Board of Directors and Cowen received the projections; they were also made available to the Purchaser and Edo. The Company's management believes that the projections were prepared on a reasonable basis and reflected its best estimates and judgment as to the GTD's expected future performance in light of the information available to it and its understanding of the Company's business strategies and practices at the time the projections were prepared. In voting to approve, and recommend shareholder approval of, the Sale, the Company's Board of Directors relied on the judgment of the Company's management as to the reasonableness of the projections. In preparing its opinion, Cowen assumed that the financial forecasts furnished to it by the Company were reasonably prepared and reflected the best currently available estimates and judgment of the Company's management as to the expected future financial performance of the GTD. Cowen relied on the accuracy and completeness of all information supplied or otherwise made available to it, including but not limited to the projections, and did not independently verify such information. The Company is not aware of any forecasts of the GTD's future performance prepared by financial analysts. THESE PROJECTIONS WERE PREPARED IN AUGUST 1997, BASED UPON A NUMBER OF ESTIMATES AND ASSUMPTIONS MADE BY THE COMPANY'S MANAGEMENT AT THAT TIME. SUCH ESTIMATES ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL, AND UPON ASSUMPTIONS WITH RESPECT TO FUTURE BUSINESS STRATEGIES AND PRACTICES THAT ARE SUBJECT TO CHANGE. THE PROJECTIONS AND ACTUAL RESULTS WILL VARY, AND THOSE VARIATIONS MAY BE MATERIAL. BASED UPON THE GTD'S PERFORMANCE SINCE JULY 1997, THE COMPANY'S MANAGEMENT BELIEVES THAT THE PROJECTIONS WERE NOT REALIZED DURING THE FISCAL YEAR ENDED OCTOBER 31, 1997. The following material assumptions were used by the Company's management in preparing the projections: 1. The GTD being a stand-alone entity with sole focus on sales to prime contractors or subcontractors of the U.S. or foreign governments. 2. Sufficient cash could be obtained from external sources for investment in the GTD to fund receivables, development, and proposals. 3. A sufficient level of business could be achieved from continued business relationships with existing customers such as McDonnell Douglas and Daimler Benz Aerospace. 4. A significant level of qualified employees who worked in the GTD could be maintained in order to achieve satisfactory performance on existing contracts and provide competent competitive proposals for future work. THE PROJECTIONS WERE NOT PREPARED WITH A VIEW TO PUBLIC DISCLOSURE OR COMPLIANCE WITH GUIDELINES ESTABLISHED BY THE COMMISSION OR THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS. THE COMPANY DID NOT ENGAGE ANY INDEPENDENT AUDITORS OR ACCOUNTANTS TO EXAMINE, COMPILE OR OTHERWISE BECOME INVOLVED WITH THE PREPARATION OF THE PROJECTIONS. THE PROJECTIONS ARE INCLUDED IN THIS PROXY STATEMENT SOLELY BECAUSE THEY WERE PROVIDED TO COWEN IN CONNECTION WITH THE PREPARATION OF COWEN'S OPINION, AND THE PROJECTIONS SHOULD NOT BE RELIED UPON FOR ANY PURPOSE OTHER THAN TO ASSIST IN AN UNDERSTANDING OF THE ANALYSIS ON WHICH THAT OPINION WAS BASED. THE INCLUSION OF THE PROJECTIONS HEREIN SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE PROJECTIONS WILL BE ACHIEVED IN THE EVENT THE GTD REMAINS PART OF THE COMPANY. THE COMPANY DOES NOT INTEND TO UPDATE OR OTHERWISE REVISE THE PROJECTIONS TO REFLECT CIRCUMSTANCES EXISTING AFTER THE DATE WHEN MADE OR TO REFLECT THE OCCURRENCE OF FUTURE EVENTS, EVEN IN THE EVENT THAT ANY OR ALL OF PROJECTIONS ARE SHOWN TO BE INACCURATE. CERTAIN FINANCIAL INFORMATION, INCLUDING PROJECTIONS (ALL AMOUNTS IN MILLIONS OF DOLLARS)
FISCAL YEAR ENDED OCTOBER 31, ------------------------------------------------------- 1995 1996 1997E 1998E 1999E --------- --------- --------- ----------- --------- Total Sales............................................................. $ 16.4 $ 14.1 $ 10.7 $ 9.0 $ 14.0 Cost of Goods Sold...................................................... 11.9 10.7 8.9 6.0 9.0 --------- --------- --------- --- --------- Gross Profit............................................................ 4.5 3.4 1.8 3.0 5.0 Selling & Administrative Expenses....................................... 3.5 4.2 3.1 2.5 3.5 MD & Rental Expense Adjustments......................................... (0.0) (0.0) 0.2 0.0 (0.3) --------- --------- --------- --- --------- Operating Profit........................................................ $ 1.0 $ (0.9) $ (1.2) $ 0.5 $ 1.2
It should be noted that these projections are predicated on the GTD being separated from the Company and operated under reduced salary and operating costs, a circumstance not considered possible at the Company. Management believes that had it been required to retain the GTD, a reduction in salaries and staff members in the GTD would have been mandatory to minimize losses. It was believed that such actions would have created a difficult morale condition in the MTD, whose employees would have been concerned that such cost reduction methods were to be imposed on them. The consequences of such a morale problem were forecast to be defections of important software development personnel and the consequent reduction in the MTD's ability to perform when it was already fully committed on existing contracts. Management's view is that the retention of the GTD as part of the Company, even if cost reduction methods were implemented, would have resulted in continuing losses in the ensuing years and absorbed both capital and management time better spent in the development of the MTD. Forecasts showing a profit of $.5 million in fiscal 1998, if the GTD were to be sold, would have changed to losses of at least $1 million based on historical data for 1997 even if the MTD were able to meet the $9 million revenue projection. AS INDICATED ABOVE, THE COMPANY'S MANAGEMENT BELIEVES THAT THE PROJECTIONS WERE NOT REALIZED DURING THE FISCAL YEAR ENDED OCTOBER 31, 1997. AMONG THE IMPORTANT FACTORS THAT THE COMPANY BELIEVES MAY CAUSE THE PROJECTIONS TO DIFFER MATERIALLY FROM THE ACTUAL RESULTS ARE: (I) LOWER SALES THAN THOSE FORECAST, (II) CANCELLATION OF EXISTING CONTRACTS, AND (III) CHANGES IN THE COST OR AVAILABILITY OF MATERIALS, (IV) UNEXPECTED OR ADVERSE CHANGES THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON THE GTD AND THE DEFENSE INDUSTRY GENERALLY, ESPECIALLY THE CYCLICAL NATURE OF THE DEFENSE INDUSTRY AND A CONTINUED EXTENDED DOWNTURN IN THE DEFENSE INDUSTRY RESULTING FROM, AMONG OTHER THINGS, THE END OF THE "COLD WAR"; AND (V) ADVERSE EFFECTS ON THE GTD'S ABILITY TO CARRY OUT ITS CURRENT BUSINESS STRATEGY, WHICH DEPENDS UPON SUCH FACTORS AS ITS ABILITY TO COMPETE EFFECTIVELY FOR GOVERNMENT CONTRACTS AND THE AVAILABILITY OF ADDITIONAL FINANCING TO FINANCE DEVELOPMENT EFFORTS. IN ASSESSING THE PROJECTIONS, READERS ARE URGED TO READ CAREFULLY ALL OF THE FOREGOING CAUTIONARY STATEMENTS. INTERESTS OF CERTAIN PERSONS IN THE SALE AND CERTAIN ARRANGEMENTS REGARDING CERTAIN DIRECTORS AND MANAGEMENT OF BASE TEN FOLLOWING THE SALE; CONFLICTS OF INTEREST In considering the recommendation of the Special Committee and Base Ten's Board with respect to the Sale, shareholders should be aware that certain members of management and the Board of Directors of Base Ten have certain interests in the Sale that are in addition to and, in the case of certain officers and directors, potentially adverse to, the interests of shareholders of Base Ten generally. The Board of Directors of Base Ten was aware of these interests and considered them, among other matters, in approving the Purchase Agreement and recommending its approval and adoption by the shareholders of Base Ten at the Meeting. THE MANAGEMENT GROUP. The Management Group is led by Mr. Klinsport and consists primarily of senior operating personnel of the GTD, certain of whom will own equity interests in, and all of whom will be employed by, the Purchaser. The senior executive officers of the Purchaser will initially consist of Mr. Klinsport, who will serve as President and Chief Executive Officer, and four other individuals, Jeffrey Billie, Marguerite Cole, Edwin Struble and Rodney Wurst, all of whom are presently employees of the GTD and all of whom are presently officers of the Company except for Jeffrey Billie. Each of the senior executive officers of the Purchaser will own an equity interest in the Purchaser, in the following percentages: Mr. Klinsport (3.6%), Mr. Billie (0.875%), Ms. Cole (0.875%), Mr. Struble (0.875%), and Mr. Wurst (0.875%); and each may also participate in the Purchaser's employee stock option plan. Consequently, members of the GTD's management and, in particular, Mr. Klinsport, may be deemed to have a conflict between their duties as employees of Base Ten and their interests in the Purchaser. However, evaluation and negotiation of the Management Group's proposal was conducted by the Special Committee, and evaluations and discussions of the Management Group's offer by the Base Ten Board at its meetings were conducted without Mr. Klinsport being present. LEASE OF PREMISES. The Company entered into a sale and leaseback agreement on October 28, 1994. Under the arrangement, the Company sold its main building at One Electronics Drive, Trenton, New Jersey, and agreed to lease it back for a period of 15 years under terms that qualify the arrangement as a capital lease. The buyer/lessor of the building was a partnership and Mr. Myles M. Kranzler, the Company's chairman and chief executive officer, is a minority partner in that partnership. The Purchase Agreement provides that the Purchaser and the Company will enter into a sub-lease, pursuant to which the Company will, for a term of five years, sub-lease to the Purchaser approximately 40,000 square feet (including 10,000 square feet of common space) at such building. See "The Purchase Agreement, Note and Warrant--Sublease", below. The Sale will not constitute a "change of control" of the Company under any applicable corporate instruments or agreements. CONSULTING AGREEMENTS. Base Ten has executed consulting agreements with each of Messrs. Klinsport and Kranzler. The Special Committee had rejected an initial proposal that Mr. Klinsport receive one year's salary as a termination payment, taking into consideration Mr. Klinsport's probable voluntary resignation upon a sale of the GTD. However, the Company's Special Committee recognized the Company's need for transitional financial accounting services and for continuity of chief financial officer functions, in order both to achieve an orderly transition and preserve the benefits of Mr. Klinsport's long years of experience as Base Ten's chief financial and accounting officer. Consequently the Special Committee proposed, and the Base Ten Board approved, a consulting agreement on the terms described below. The Board of Directors and the Special Committee believe the consulting arrangement with Mr. Klinsport is necessary to make certain of the Company's short-term requirements, as described above, and that the terms of the arrangement are fair to the Company under the circumstances, it being unlikely in the opinion of the Board and the Special Committee that it could have obtained the services of any persons with Mr. Klinsport's knowledge and background for a short-term consulting arrangement on similar or more favorable terms. Mr. Klinsport's consulting agreement will take affect upon the closing of the Sale. The consulting agreement with Mr. Klinsport provides for Mr. Klinsport to be available as a consultant to Base Ten for two years following the Sale with respect to events and matters which occurred during Mr. Klinsport's tenure as chief financial officer of Base Ten, provided such consulting services do not interfere with Mr. Klinsport's other employment duties. In consideration of such services, Base Ten will pay to Mr. Klinsport, immediately following his termination of employment with Base Ten, $225,000, an amount equal to his current annual base salary. The Company recently appointed Thomas E. Gardner as the Company's new chief executive officer and President. Mr. Gardner comes to Base Ten with more than 25 years of management experience in the healthcare, pharmaceutical and information technology industries. Mr. Gardner was most recently President, chief executive officer, chief operating officer and a director of Access Health, Inc. in Rancho Cordova, California. Access Health is a publicly traded health information services company. As a top level executive with Johnson & Johnson from 1974 through 1987, Mr. Gardner headed up a number of the company's major domestic and international divisions and instituted a number of programs that advanced the company's markets and profitability. Subsequently, Mr. Gardner took his technological skills and medical knowledge into the publishing field. From 1987 until 1990, he was Group President of Simon & Schuster a subsidiary of Paramount Communications, Inc., where he instituted electronic management technology as part of a productivity improvement program. In 1992 he joined The Dunn & Bradstreet Corporation where as Corporate Vice President, and President and chief executive officer of its subsidiary, Dun & Bradstreet Health Care Information, he helped develop an integrated information and decision support technology. Mr. Gardner had additional experience as President, chief executive officer and chief operating officer of IMS America, Ltd. during his tenure at Dun & Bradstreet. Mr. Gardner's employment with Base Ten commenced on November 1. At that time, Mr. Kranzler resigned as chief executive officer. Mr. Kranzler's consulting agreement took effect on November 1. The consulting agreement with Mr. Kranzler provides for Mr. Kranzler to be available as a consultant to Base Ten for one year, but not in excess of 65 working days, for which services Mr. Kranzler will receive $100,000. For consulting services in excess of 65 working days per year, Mr. Kranzler would receive a fee of $1,600 per day. Mr. Kranzler will receive payment of all accrued and unpaid salary and vacation pay, and Mr. Kranzler and his spouse shall be entitled to continue their existing health and dental insurance coverages, at the Company's expense, for the remainder of their respective lives. Mr. Kranzler will agree not to compete with Base Ten for a two-year period. Also as part of such consulting agreement, the Company has agreed to pay to Mr. Kranzler a fee of $300,000 in consideration of the consulting and non-compete covenants and commitments by Mr. Kranzler described above, of which $150,000 will be due and payable upon the consummation of a financing in which the gross proceeds to the Company exceeds $5 million, and the remainder upon the consummation of one or more financings in which the gross proceeds to the Company (including proceeds of all financings consummated after October 6, 1997) exceed $10 million. The financing transaction described under the caption "The Proposed Issuance", if consummated in full, would result in the full fee being payable to Mr. Kranzler. CERTAIN TAX CONSEQUENCES OF THE SALE Although the Sale will constitute a taxable transaction, the Company anticipates that after giving effect to expenses of the transaction it will incur a taxable loss in an amount the Company does not believe will be material. THE PURCHASE AGREEMENT, NOTE AND WARRANT GENERAL. Pursuant to the terms of the Purchase Agreement, in consideration of the transfer to the Purchaser of substantially all of the operating assets of the GTD (the "Assets"), which comprise specified inventory, fixed assets and tangible personal property, intangible personal property and contract rights. The Purchaser has agreed to pay the Company the consideration described below and to assume certain liabilities associated with the GTD (the "Assumed Liabilities"). CONSIDERATION. In consideration of the Assets and assumption of the Assumed Liabilities, at the closing of the Sale (the "Closing") the Company will receive the following from the Purchaser: A. CASH. $3,500,000 in cash. B. NOTE. A promissory note (the "Note") dated as of the Closing, to be issued by the Purchaser in favor of the Company, in a principal amount equal to the difference between (x) the amount of the net assets of the GTD as of the Closing (as such amount shall be determined jointly by the Purchaser and the Company on the basis of the Company's books of account) plus $400,000, and (y) $3,500,000. The Note will have a term of five years and will bear interest at the rate of 7.5% per annum, compared with the Company's existing debt (all of which is unsecured), which bears interest at annual rates of 8.5% or 9.1%. Principal payments under the Note will amortize over a three year period beginning on the second anniversary of the Closing. Interest on the Note will be payable quarterly beginning at the end of the first fiscal quarter following the Closing. Net assets of the GTD will be the amount equal to difference between the monetary value of the Assets reduced by the monetary value of the Assumed Liabilities. The Note will be unsecured. Payment of the outstanding principal and accrued interest under the Note will be accelerated upon the occurrence of certain events including (a) any repayment of the principal of any indebtedness of the Purchaser to affiliates of the Purchaser, and (b) certain customary events of default. It is anticipated that the Purchaser will pay the principal of and interest on the Notes out of cash flow from the Purchaser's operations. Its ability to make these payments (as well as payments under the sub-lease described below) may be adversely affected by future operating losses, its obligations under other indebtedness (including indebtedness which may be secured by certain of the Assets), the Assumed Liabilities and claims of the Purchaser's creditors. The Note is not secured by any collateral. Therefore, the Company's ability to obtain payment of the Note in the event of a default may be substantially impaired by claims of any secured creditors of the Purchaser. CONSEQUENTLY, THE NET REALIZABLE VALUE OF THE NOTE MAY BE SUBSTANTIALLY LESS THAN ITS FACE AMOUNT. C. RIGHTS ON SALE OR MERGER. In the event that the Purchaser is sold, merged, or liquidated prior to its initial underwritten public offering, the Company will receive 15% of the gross proceeds of such transaction that are in excess of $7 million, and the Warrant described below will be canceled. D. WARRANT. A warrant (the "Warrant") exercisable for that number of shares of voting common stock of the Purchaser as equals 5% of the Purchaser's issued and outstanding shares of common stock and common-stock equivalents (giving effect to all outstanding convertible debt securities, warrants and options issued in financing transactions, but not to options or warrants issued or issuable to employees or others that are in the place of compensation for services) immediately following and giving effect to the Purchaser's initial underwritten public offering, with respect to which there can be no assurance. The exercise price of the Warrant shall be 5% of two (2) times the current valuation of the Purchaser, such valuation being the sum of (w) $3,500,000, (x) the principal amount of the Note, (y) any payments made in connection with the Daimler Benz Aerospace contract as described below, and (z) the amount of any additional cash contributed or loaned to the Purchaser by any person prior to or within 30 days of the Closing. The Warrant will be exercisable, commencing immediately following the closing of the Purchaser's initial underwritten public offering, for a five-year term, and will contain customary anti-dilution protection against subsequent stock splits, stock dividends and combinations (but not against subsequent additional sales of capital stock, whether or not dilutive). The shares issuable on exercise of the Warrant will be restricted from sale for a one-year period following an initial public offering, but not more than 180 days beyond the termination of any lock-up period imposed on the Purchaser's executive officers, directors and principal shareholders. The Purchaser will register the shares issuable on exercise of the Warrant under the Securities Act of 1933 for resale by the Purchaser commencing when the restriction expires. The Warrant includes a cashless exercise feature which may be utilized only with the Purchaser's consent and provisions for tendering indebtedness of the Purchaser to the Company as all or part payment for the Warrant exercise price. THE WARRANT WILL HAVE NO VALUE UNLESS (I) THE PURCHASER CONSUMMATES AN INITIAL PUBLIC OFFERING, AND (II) THE SHARES ISSUED ON EXERCISE OF THE WARRANT CAN BE SOLD AT A PRICE IN EXCESS OF THE WARRANT EXERCISE PRICE PER SHARE. E. CONTINGENT PAYMENT. If, within twelve months of the Closing, the Purchaser enters into an agreement with Daimler Benz Aerospace pursuant to which Daimler Benz Aerospace agrees to purchase 600 or more Pylon Decoder Units, then, as additional consideration, the Purchaser will pay the Company $400,000, which amount will be payable in the amount of $100,000 per fiscal quarter beginning three months after the Purchaser receives the initial order under such agreement. CLOSING. The closing of the Sale (the "Closing") will occur as soon as practicable following the approval and adoption of the Purchase Agreement providing for the Sale and the Option Amendments by the Company's shareholders at the Meeting. The obligations of the parties to consummate the Sale are subject to certain customary conditions such as (i) the continued accuracy of representations and warranties in the Purchase Agreement, (ii) the performance in all material respects of each party's respective obligations under the Purchase Agreement required to be performed at or prior to Closing, (iii) all governmental and third party consents required under the Purchase Agreement shall have been obtained, and (iv) no action by any government authority or other person shall have been instituted or threatened challenging the validity or legality of the transactions contemplated by the Purchase Agreement or which could reasonably be expected to damage the other parties to the Purchase Agreement. ASSETS AND LIABILITIES TO BE TRANSFERRED. The Assets to be transferred to the Purchaser include all accounts receivable, contract rights, inventory, fixed assets, and equipment and technology used or needed for use by the GTD Division. Assumed liabilities include all liabilities incurred in the ordinary course of the GTD's business. SUB-LEASE. The Company entered into a sale and leaseback agreement on October 28, 1994. Under the arrangement, the Company sold its main building at One Electronics Drive, Trenton, New Jersey, and agreed to lease it back for a period of 15 years under terms that qualify the arrangement as a capital lease. The buyer/lessor of the building was a partnership and the Company's chairman and chief executive officer, Mr. Myles M. Kranzler, is a minority partner in the partnership. The Purchase Agreement provides that the Purchaser and the Company will enter into a sub-lease, dated as of the Closing, pursuant to which the Company will, for a term of five years, sub-lease to the Purchaser approximately 40,000 square feet at such building (the "Leased Space"). The Leased Space will be comprised of (i) office and manufacturing space occupying approximately 30,000 square feet, and (ii) common area space, which space will be shared with the Company, occupying approximately 10,000 square feet. The initial rent that the Purchaser will pay the Company for the Leased Space will be at the rate of (x) $7.00 per square foot for the office and manufacturing space, and (y) $3.00 per square foot for the shared common areas, or a total of approximately $240,000 annually. In addition, the Purchaser will be responsible for its pro rata portion, based on the amount of space occupied by the Purchaser, of the building's electric, heating, insurance, tax and maintenance expenses. TRANSITION AGREEMENT. The Purchase Agreement provides that the Purchaser and the Company will enter into an agreement, dated as of the Closing (the "Transition Agreement"), pursuant to which the Purchaser will continue to provide the Company with accounting, reception, personnel and facilities and janitorial services for a period of three months from Closing. To the extent that those services have heretofore involved or been provided by the Company's employees, those employees (including, principally, Mr. Klinsport) are in the Management Group or among the Company employees who will be employed by the Purchaser. The fees for such services will be determined by the Purchaser and the Company at or prior to Closing. REPRESENTATIONS AND WARRANTIES. The Purchase Agreement contains various representations and warranties of the Company including, among others, representations and warranties relating to organization and similar corporate matters; authorization, performance, enforceability and related matters; requisite consents; absence of brokers; compliance with applicable environmental law; transferability of contracts; and intellectual property. The Purchase Agreement contains various representations and warranties of the Purchaser including, among others, representations and warranties related to organization and similar corporate matters; authorizations, performance, enforceability and related matters; requisite consents; accuracy of information provided for inclusion in this Proxy Statement, and absence of brokers. COVENANTS. Pursuant to the Purchase Agreement, (i) the Company has agreed, among other things, to satisfy all conditions to its obligations to consummate the transactions contemplated by the Purchase Agreement, and (ii) the Purchaser has agreed, among other things, to satisfy all conditions to its obligations to consummate the transactions contemplated by the Purchase Agreement and to pay and perform all of its obligations under the Assumed Liabilities. INDEMNIFICATION. The Company has agreed to indemnify the Purchaser from and against damages arising out of or based upon (i) the breach by the Company of any representation or warranty made by the Company pursuant to the Purchase Agreement relating to environmental matters; (ii) the non-performance of any covenant made by it pursuant to the Purchase Agreement; and (iii) any other liabilities of the GTD not assumed by the Purchaser. The Purchaser has agreed to indemnify the Company from and against any damages which arise out of or are based upon (i) the non-performance of any covenant made by it pursuant to the Purchase Agreement; and (ii) the failure to satisfy any of the Assumed Liabilities. TERMINATION; BREAK-UP FEE. The Purchase Agreement may be terminated (i) by either the Purchaser or the Company if, upon a vote at a duly-held meeting of the Company's shareholders, any required approval of the Company's shareholders is not obtained, (ii) by the mutual written consent of the Purchaser and the Company, (iii) by either the Company or the Purchaser if the Closing has not occurred on or before the last to occur of (x) 30 days after the staff of the Securities and Exchange Commission has advised the Company that it has no further comments with respect to any preliminary filings of this Proxy Statement, or (y) January 7, 1998, provided that the delay or failure to consummate the Closing by that date is not because of a breach of the Purchase Agreement by the party seeking to terminate it, and (iv) by either party in the event of a material breach by the other party of any representation, warranty, covenant or agreement contained in the Purchase Agreement, which breach cannot be or has not been cured within 30 days after the giving of written notice to the breaching party of such breach. If the Company terminates the Purchase Agreement pursuant to clause (i) above or other than as set forth above or if the Purchaser terminates the Purchase Agreement pursuant to clause (i), (iii) or (iv) above, then the Company will pay to the Purchaser upon demand an amount in cash equal to the sum of (x) 3% of the net assets of the GTD as of the date of termination, plus (y) 3% of $400,000. This fee will serve as the exclusive remedy to the Purchaser in the event of a breach by the Company of any provision of the Purchase Agreement, without regard to the Purchaser's actual out-of-pocket loss or consequential damages. As of July 31, 1997 (the date of the last available Company balance sheet), the amount of the fee, if then due, would have been approximately $204,000. The Company believes that, because of subsequent losses, the net asset value of the GTD, and thus the fee which may be payable, may be substantially lower as of the date of this Proxy Statement. The Purchaser has advised the Company that its actual out-of-pocket expenses through that date were approximately $125,000, and that it anticipates incurring an additional $40,000 of expenses prior to the Meeting. REGULATORY FILINGS AND APPROVALS The Company is not aware of any Federal or state regulatory filing requirements to which the Sale is subject. ACCOUNTING TREATMENT For financial reporting purposes, the transaction will be recorded as a sale of a segment of the Company's business and reported as a discontinued operation. EXPENSES AND OTHER FEES Each party will bear its own expenses in respect of the Sale transaction, whether or not consummated. APPRAISAL RIGHTS The Company's shareholders are not entitled to dissenters' rights of appraisal in connection with the Sale. REQUIRED VOTE Assuming a quorum is present, the affirmative vote of seventy-five percent (75%) of the vote cast by holders of shares of Common Stock entitled to vote thereon, and in addition, the affirmative vote of seventy-five percent (75%) of the votes cast by holders of Class B Stock, will be required for approval and adoption of the Purchase Agreement providing for the Sale. THE GOVERNMENT TECHNOLOGY DIVISION EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS PROXY STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS OR OUTCOMES TO BE MATERIALLY DIFFERENT FROM THOSE ANTICIPATED AND DISCUSSED HEREIN. IMPORTANT FACTORS THAT THE COMPANY BELIEVES MIGHT CAUSE SUCH DIFFERENCES ARE DISCUSSED IN THE CAUTIONARY STATEMENTS ACCOMPANYING THE FORWARD-LOOKING STATEMENTS IN THIS PROXY STATEMENT AND IN THE RISK FACTORS DETAILED IN THE COMPANY'S PREVIOUS FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. IN ASSESSING FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, READERS ARE URGED TO READ CAREFULLY ALL CAUTIONARY STATEMENTS CONTAINED IN THIS PROXY STATEMENT AND IN THOSE OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. The Company, through its Government Technology Division, develops, manufactures and markets complex precision electronic systems for defense applications and provides contract manufacturing services for prime defense contractors. These products primarily relate to weapons management in high performance military aircraft and employ the Company's safety critical technology and software. The GTD designs products internally, in conjunction with defense contractors, and under U.S. government contracts. PRODUCTS AND PROGRAMS TORNADO PROGRAM. Since 1976, the GTD has been involved in the design and production of weapons control systems for the German and Italian versions of the Tornado aircraft. These systems are designed to aid the operator of a sophisticated combat aircraft in deploying highly complex weapons. The Tornado program is a joint program of the governments of Germany, United Kingdom, and Italy for a multi-role combat aircraft to meet the particular defense missions of these three countries. The GTD's participation in Tornado programs has also included contracts to supply certain elements of the system to British Aerospace for sale to the United Kingdom and Saudi Arabia. The most important and complex weapons control system manufactured by the GTD for the Tornado program is the Stores Management System ("SMS"). The SMS employs a visual display to communicate the current status of weapons on board the aircraft to the operator. It permits the operator to select appropriate weapons, to confirm or change the selection of weapons, and to execute other functions such as weapon jettison and fault detection. All of these actions are regulated by a weapons programming unit containing multiple microprocessors and their memories. The SMS has up to seven electronic units, remotely located from the weapons programming unit, to receive and decode release instructions and activate switches connected to weapon release mechanisms. The Company, through the GTD, manufactures the SMS for the Tornado program under a contract with Daimler Benz Aerospace (DASA). The Tornado program extends beyond the year 2000 and could offer the GTD significant additional business. In fiscal 1994, 1995, and 1996, and the nine months ended July 31, 1997, sales under the Tornado program accounted for approximately 36%, 36%, 37% and 9.5%, respectively, of the Company's total revenues. In 1995, the Company received full funding for additional production of weapons control products for the Tornado program under contracts valued at approximately $6.3 million. This contract was completed in early 1997. Commencing in the first quarter of fiscal 1996, initial funding was received for Tornado software upgrades under a contract valued at $1.8 million which extended into 1997 and is expected to be completed by early 1998. During the fiscal quarter ended July 31, 1997, the GTD was provided cost and pricing information for additional production for the Tornado Stores Management System and was advised that the customer anticipates placing an $11.4 million order before the end of 1997. No order has been received to date. The award of this contract is dependent on, among other factors, the defense budget of the German government. Efforts to secure the released funds for this contract have been unsuccessful in the past due to budget allocations for other priorities and there currently can be no assurance of the award of such contract. If the $11.4 million Tornado order is received prior to the Meeting, the Company intends to provide to its shareholders information concerning the receipt of the order and adjourn the meeting for up to two weeks to afford shareholders an opportunity to recast their votes if they wish to do so. OTHER PROGRAMS. The GTD has designed and manufactured Sidewinder control systems for the U.S. Air Force A-10 aircraft, the A-4 modernization programs for the Royal Air Force of New Zealand and certain aircraft flown by the Greek Air Force, and the F-5 aircraft for delivery to the Taiwan Air Force. Since 1980, the Company as a contract manufacturer has, through the GTD, supplied electronic systems to McDonnell Douglas Helicopter Systems for use aboard the U.S. Army's Apache helicopter. The Company is also a contract manufacturer for SPD Technologies, Inc., a circuit breaker manufacturer. The Company has funded research and development of technology used for the control of air-to-air and air-to-ground missiles such as Sidearm, Stinger and Mistral and has provided a missile control system for the Stinger missile for experimental use aboard the U.S. Army's Apache helicopter. NEW PROGRAMS. The GTD was notified by McDonnell Douglas Helicopter Systems in April 1996 that it had been selected to provide the design, development, and initial production of a maintenance data recorder (black box) for the U.S. Army's Apache helicopter. Revenue for this contract, has been recognized in 1996 and 1997 to date, and additional revenue, a small portion of which will be received by the Purchaser following the Sale, will be recognized in the remainder of 1997 and 1998. Follow on production, if awarded to the GTD, is expected to continue beyond the year 2000 assuming government funding. In May 1996 the GTD was notified that it had been selected to provide the engineering and initial production for an Interference Blanking Unit (IBU) used aboard the F-18 fighter aircraft. This project has potential application for usage aboard other aircraft for both the U.S. and its allies. If procured for the F-18 alone the IBU could require production runs beyond the year 2000, which would be undertaken by the Purchaser if the Sale is completed, providing government funding and strategic defense decisions continue, neither of which can be assured. This project is nearing completion of the development and qualification stage and production orders are anticipated for 1998, although no assurances can be given that significant orders will be placed. SECURE COMMUNICATIONS PRODUCTS. The GTD has engaged in the development and sale of products for secure communications systems to the National Security Agency and the U.S. Navy. The GTD's initial product was a telecommunications interface known as a TCIA for the transmission of encrypted data over a conventional T1 telephone line. The TCIA was endorsed by the National Security Agency in 1991 but has been restricted to government users. In 1991, the GTD was awarded a contract to manufacture Bus Interface Units for the U.S. Navy's communication system using the Navy's design. The GTD subsequently created a proprietary device, known as the Bus Interface Card ("BIC"), to substitute for the Bus Interface Unit, and has since sold over 9,500 of these devices. The BIC connects external signals to a signal bus through software driven control circuits. The software, programmed to prioritize signals for processing, was designed by the Navy but includes BIC software which was designed by the Company. The GTD anticipates further contracts for this product over the next several years, although at a slower rate than in prior years. The GTD also developed a proprietary device known as the Synchronous Line Interface Card ("SLIC"). The SLIC is suitable for laptop computers and performs the same functions as the BIC. The GTD has received a small quantity of orders for this device but believes that SLIC may eventually replace the BIC as the device of choice. SALES AND MARKETING The GTD currently markets its products a single vice president of sales. In addition, certain officers of the Company, some of whom are members of the Management Group, are responsible for maintaining relationships with specific U.S. and foreign defense contractors. The Company relies and the Purchaser will rely on established relationships with major defense contractors such as DASA, McDonnell Douglas, Northrop, and various agencies within the U.S. Department of Defense to develop further business based on past association and familiarization with existing programs such as Tornado, F-5, Apache Helicopter, and the A-10 combat aircraft. RESEARCH AND DEVELOPMENT GTD product development efforts consist of designing new weapon control systems and upgrades for existing aircraft fleets based upon specifications provided by defense contractors. Generally, such development projects are undertaken pursuant to contractual arrangements with defense contractors, under which the GTD receives full or partial funding. The GTD believes its participation in development contracts provides an advantage in bidding for subsequent production contracts. The GTD research and development staff consists of approximately five engineers who devote a portion of their time to defense product development. COMPETITION The defense business is also highly competitive and subject to rapid change. The GTD competes, and the Purchaser will compete, primarily on its expertise in designing safety critical applications. Competitors include large defense contractors and specific departments of large electronic companies such as McDonnell Douglas, Lockheed Martin, Hamilton Standard Company, a division of United Technologies Corporation, GEC Marconi, Elbit and Smiths Industries. Many of these competitors are larger and have more resources to devote to, among other things, internally-funded development efforts that could provide advantages in competitive bidding. MANUFACTURING The GTD's operations involve assembling and testing final products from components and subassemblies purchased from third parties. The GTD also designs software used in the products manufactured pursuant to third-party requirements. All of the GTD's design, assembly and production activities are conducted from its Trenton, New Jersey, facility. Electronic components, such as transistors, resistors, integrated circuits and diodes, and subassemblies used in the GTD's products, are purchased by the GTD from a large number of suppliers and are generally available from alternative sources. However, for some components and subassemblies, the GTD relies on a single source of supply. For such components and subassemblies, the GTD attempts to maintain inventory levels sufficient to cover foreseeable production requirements for a period the GTD believes will be sufficient to locate alternative sources of supply or to develop alternative designs that avoid reliance on those components or subassemblies. As part of its contract manufacturing services, the GTD offers supporting engineering services to develop a prime contractor's design and solve technical and manufacturing problems. BACKLOG All of the GTD's sales and unbilled orders are with defense-related customers. Total GTD backlog as of July 31, 1997, was approximately $4.7 million (compared with $7.1 million of October 31, 1996 and $8.8 million at July 31, 1996) with $2.5 million scheduled for delivery in the remainder of the current fiscal year, and $2.2 million scheduled for delivery in fiscal 1998. Unfilled backlog as of the closing of the Sale will be assumed by the Purchaser. PROPRIETARY RIGHTS The Company regards its software as proprietary and attempts to protect it with copyrights, trademarks, trade secret law, and contractual arrangements, certain of which will be assigned or licensed on a royalty-free basis, to the Purchaser. However, existing copyright laws offer only limited practical protection for software. Furthermore, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. Customer access to source code may increase the possibility of misappropriation or other misuse of the Company's software. Accordingly, it may be possible for unauthorized third parties to copy certain portions of the Company's software or to obtain and use information that the Company regards as proprietary. There can be no assurance that the Company's or the Purchaser's means of protecting its proprietary software will be adequate or that competitors will not independently develop technologies similar to the Company's. While the Company has received certain patent protection for GTD designs, all of which will be assigned to the Purchaser, there can be no assurances that any additional patents will be issued, that the scope of any patent protection will be adequate, or that any current or future issued patents will be held valid if challenged. The Company believes that the GTD's products and technology do not infringe any existing proprietary rights of others, although there can be no assurance that third parties will not assert infringement claims in the future. REGULATIONS The GTD's United States military contracts are subject to pricing restrictions and audit procedures. After being selected as the successful bidder for a government contract, profits for most products and systems developed for domestic defense programs are subject to fact finding, with negotiated profits limited to approximately 10% of costs, with some actual costs not recognized for this purpose. The GTD has undergone routine government audits of its defense contracts from time to time and these audits have upheld the GTD's pricing. Most of the GTD's foreign sales involve defense-related products that are subject to export control through the Department of State's Office of Munitions Control under the International Traffic in Arms Regulations ("ITAR") adopted under the Arms Export Control Act. All articles and services listed on the United States Munitions list, which may be amended from time to time, fall under these regulations. In order to export products or services subject to these regulations, the Company (and, after the Sale, the Purchaser) must first acquire licenses from the Department of State for each individual contract. State Department policies, as supplemented or modified by the Department of Defense or other applicable government agencies, identify products that cannot be exported and certain countries to which export is prohibited or limited. ITAR also imposes certain restraints on foreign customer contracts and defense product development. Since the Purchaser intends to continue its pursuit of foreign military sales as a source of revenues, ongoing compliance with ITAR will be necessary. Should government policy dictate that some of the GTD's products are of a sensitive technological character in which the best interests of the United States will be served by prohibiting their export, the Company (and after the Sale, the Purchaser) could suffer a serious and immediate loss of business. The Company's principal foreign markets for defense-related products are, and after the Sale the Purchaser's principal foreign markets for defense-related products will be, located in the NATO countries and other nations friendly to the United States. To date, the United States government has not denied requests by the Company for licenses to export any of its products or technical data to these countries except in instances where all United States manufacturers of similar products would be equally denied. EMPLOYEES The GTD currently employs a total work force of approximately 85 persons, including 50 engineers, designers and technical staff, plus additional contract labor. None of the GTD's employees are covered by collective bargaining agreements. The GTD has never experienced any labor disruptions or work stoppages and considers its employee relations to be good. The GTD has recently effected a reduction in staff of approximately 30 persons. SECURITY CLEARANCE The Company, including the GTD, relies on the continuance of its security clearances and clearances of its employees from agencies of the United States government and from NATO for its defense products. Loss of these clearances could have an immediate and adverse effect on the Company's (and after the Sale, the Purchaser's) business. Clearance of the foregoing types must be secured by the Purchaser prior to the Closing of the Sale, and the loss of any of them following the Sale could adversely affect the business and prospects of the Purchaser. The GTD has never experienced any material deficiencies in the manner and method of complying with prescribed security regulations and the Purchaser expects to continue as an approved facility following the Sale. PROPERTIES The GTD's sole facility is in Trenton, New Jersey. The Company occupies 82,000 square feet in Trenton for its corporate headquarters and engineering, manufacturing and support activities. The lease for such space expires in October 2009. Approximately 40,000 square feet of such space (including 10,000 square feet of common space) will be sub-leased by the Purchaser for five years. See "The Proposed Sale-- The Purchase Agreement, Note and Warrant-Sublease". Management believes that the GTD's facilities are adequate for its operations and are maintained in good condition. UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF THE COMPANY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET OF THE COMPANY The unaudited pro forma condensed consolidated balance sheet has been derived from the historical consolidated balance sheet of the Company. The unaudited pro forma condensed consolidated balance sheet of the Company has been prepared assuming the Sale of the GTD occurred on July 31, 1997. The unaudited pro forma condensed consolidated balance sheet should be read in conjunction with the historical financial statements of the Company and the notes thereto for the three years in the period ended October 31, 1996 and for the nine months ended July 31, 1997 included in this Proxy Statement. The unaudited pro forma condensed consolidated balance sheet is not necessarily reflective of the financial position of the Company had the Sale of the GTD occurred on July 31, 1997. BASE TEN SYSTEMS, INC. PROFORMA CONSOLIDATED BALANCE SHEET AS OF JULY 31, 1997
COMPANY PRO-FORMA COMPANY HISTORICAL SALE(1) ADJUSTMENTS PRO-FORMA ---------- --------- ------------- ---------- ASSETS CURRENT ASSETS: Cash..................................................... $ 3,771 $ -- $ 3,500(2) $ 7,271 Accounts Receivable...................................... 7,181 (4,375) 2,806 Inventories.............................................. 3,868 (3,111) 757 Current portion of employee loan receivable.............. 128 -- 128 Other current assets..................................... 601 -- 601 ---------- --------- ------ ---------- TOTAL CURRENT ASSETS................................... 15,549 (7,486) 3,500 11,563 PROPERTY, PLANT & EQUIPMENT................................ 5,209 (862) 4,347 EMPLOYEE LOAN RECEIVABLE................................... 47 -- 47 NOTES RECEIVABLE........................................... -- -- 3,322(2) 3,322 OTHER ASSETS............................................... 8,717 8,717 ---------- --------- ------ ---------- TOTAL ASSETS........................................... $ 29,522 $ (8,348) $ 6,822 $ 27,996 ---------- --------- ------ ---------- ---------- --------- ------ ---------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable......................................... $ 1,045 (592) $ $ 453 Accrued Expenses......................................... 3,693 (1,334) 625(3) 2,984 Current portion of capital lease obligation.............. 54 -- 54 ---------- --------- ------ ---------- TOTAL CURRENT LIABILITIES.............................. 4,792 (1,926) 625 3,491 ---------- --------- ------ ---------- LONG TERM LIABILITIES: Other long-term liabilities.............................. 272 -- 272 Capital lease obligation................................. 3,441 -- 3,441 Long-term debt........................................... 15,500 -- 15,500 ---------- --------- ------ ---------- TOTAL LONG-TERM LIABILITIES............................ 19,213 -- -- 19,213 ---------- --------- ------ ---------- SHAREHOLDERS' EQUITY Preferred Stock, $1.00 par value, authorized and unissued--1,000,000 shares Class A Common Stock, $1.00 par value, 22,000,000 shares authorized; issued and outstanding 7,497,360 in 1997... 7,497 -- 7,497 Class B Common Stock, $1.00 par value 2,000,000 shares authorized; issued and outstanding 445,121 in 1997..... 445 -- -- 445 Additional paid-in capital............................... 25,603 -- 900(4) 26,503 Deficit.................................................. (27,885) (6,422) 5,297(2 (4) (29,010) ---------- --------- ------ ---------- 5,660 (6,422) 6,197 5,435 Equity adjustment from foreign currency translation...... (143) -- (143) ---------- --------- ------ ---------- 5,517 (6,422) 6,197 5,292 ---------- --------- ------ ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $ 29,522 $ (8,348) $ 6,822 $ 27,996 ---------- --------- ------ ----------
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET OF THE COMPANY: - ------------------------ (1) Assets and liabilities of the Purchaser. Although the Sale transaction has not been finalized, management believes that any remaining pro forma adjustments would not have a material effect on the financial position of the Company, except those described in Note 2 and 3. (2) Reflects the receipt of cash and a note receivable for the book value of the assets on the closing date in connection with the Sale. See "The Purchase Agreement, Note and Warrant--Consideration" for a description of the terms of the Note evidencing the note receivable. (3) Reflects the liability for expenses in connection with the Sale of $625. (4) Reflects the adjustment for the change in measurement date of certain employee stock options of $900. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME OF THE COMPANY The unaudited pro forma condensed consolidated statements of income have been derived from the historical consolidated statements of income of the Company. The unaudited pro forma condensed consolidated statement of income for the year ended October 31, 1996, and the unaudited pro forma condensed consolidated statement of income for the nine months ended July 31, 1997, has been prepared assuming the Sale occurred on November 1, 1995. The unaudited pro forma condensed consolidated statements of income should be read in conjunction with the historical financial statements of the Company and notes thereto for the three years ended October 31, 1997 and for the nine months ended July 31, 1997 included in this Proxy Statement. The unaudited pro forma condensed consolidated statements of income are not necessarily indicative of the financial results of the Company had the Sale occurred at the beginning of the period. BASE TEN SYSTEMS, INC. PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED OCTOBER 31, 1996 COMPANY COMPANY HISTORICAL SALE(1) PRO-FORMA ---------- --------- ----------- REVENUES Sales...................................... $ 14,591 $ 13,329 $ 1,262 Other Income............................... 300 -- 300 ---------- --------- ----------- Total Revenues........................... 14,891 13,329 1,562 ---------- --------- ----------- COST & EXPENSES Cost of Goods Sold......................... 10,973 10,742 231 Research and Development................... 998 594 404 Selling, General & Administrative.......... 8,509 2,353 6,156 Amortization of Software Development Costs. 1,278 -- 1,278 Write-off of software development costs.... 2,429 -- 2,429 Interest Expense........................... 710 -- 710 ---------- --------- ----------- Total Costs and Expenses................. 24,897 13,689 11,208 LOSS BEFORE INCOME TAXES..................... (10,006) (360) (9,646) ---------- --------- ----------- INCOME TAX BENEFIT........................... (1,047) -- (1,047) ---------- --------- ----------- NET LOSS $ (8,959) $ (360) $ (8,599) ---------- --------- ----------- ---------- --------- ----------- LOSS PER SHARE............................... ($ 1.16) -- ($ 1.11) ---------- --------- ----------- WEIGHTED AVERAGE SHARES OUTSTANDING.......... 7,743 -- 7,743 ---------- --------- ----------- NOTES TO PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT: (1) Revenues and expenses of the Purchaser. Although the Sale transaction has not yet been finalized, management believes that any remaining adjustments will not have a material effect on the pro forma results of operations of the Company. Does not include any adjustment for the change in measurement date of certain employee stock options, resulting in compensation expense charged to operations of $900. Also does not reflect $100 of non-recurring expenses following the Sale. BASE TEN SYSTEMS, INC. PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT FOR THE NINE MONTHS ENDED JULY 31, 1997
COMPANY COMPANY HISTORICAL SALE(1) PRO-FORMA ----------- --------- ----------- REVENUES Sales......................................................................... $ 9,808 $ 8,219 $ 1,589 Other Income.................................................................. 133 133 ----------- --------- ----------- Total Revenues.............................................................. 9,941 8,219 1,722 COST & EXPENSES Cost of Goods Sold............................................................ 8,322 6,816 1,506 Research and Development...................................................... 490 408 82 Selling General & Administrative.............................................. 6,114 2,353 3,761 Amortization of Software Development Costs.................................... 1,121 1,121 Interest Expense.............................................................. 1,139 1,139 ----------- --------- ----------- Total Costs and Expenses.................................................... 17,186 9,577 7,609 ----------- --------- ----------- LOSS BEFORE INCOME TAXES........................................................ $ (7,245) $ (1,358) $ (5,887) ----------- --------- ----------- ----------- --------- ----------- INCOME TAXES/(BENEFIT).......................................................... -- -- ----------- --------- ----------- NET LOSS........................................................................ $ (7,245) $ (1,358) $ (5,887) ----------- --------- ----------- LOSS PER SHARE.................................................................. ($ 0.92) ($ 0.75) ----------- --------- ----------- WEIGHTED AVERAGE SHARES OUTSTANDING............................................. 7,852 7,852 ----------- --------- -----------
NOTES TO PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT: (1) Revenues and expenses of the Purchaser. Although the Sale transaction has not yet been finalized, management believes that any remaining adjustments will not have a material effect on the pro forma results of operations of the Company. Does not include any adjustment for the change in measurement date of certain employee stock options, resulting in compensation expense charged to operations of $900. Also does not reflect $100 of non-recurring expenses following the Sale. INFORMATION CONCERNING THE PURCHASER BUSINESS. The Purchaser, Strategic Technology Systems, Inc., is a newly formed Nevada corporation whose principal assets will be those assets of the GTD acquired pursuant to the Purchase Agreement. Thereafter, the Purchaser will continue to carry on the businesses of the Government Technology Division under its own management team at its principal executive offices located in the Trenton facility. MANAGEMENT. The senior executive officers of the Purchaser will initially consist of Mr. Klinsport, who will serve as President and Chief Executive Officer, and four other individuals, Jeffrey Billie, Marguerite Cole, Edwin Struble and Rodney Wurst, all of whom are presently employees of the GTD and all of whom are presently officers of the Company except for Jeffrey Billie. The Board of Directors of the Purchaser currently consists only of Mr. Klinsport. It is anticipated that the Purchaser's board of directors will be expanded to include a representative of the Purchaser's non-employee shareholders, and one or more other outside directors. PRINCIPAL SHAREHOLDERS. The principal shareholders of the Purchaser will be Mr. Klinsport, the other four executives described above, and certain outside investors, some or all of whom are expected to be affiliates of Mr. Jesse L. Upchurch, a principal shareholder of the Company. See "Security Ownership of Management and Certain Beneficial Owners." CAPITALIZATION. The Purchaser is expected to be initially capitalized immediately prior to the sale with equity financing of approximately $5.5 million in cash, of which $3.5 million will be paid to the Company at the Closing, and approximately $750,000 will be utilized to pay professional fees, financial advisory fees and other expenses related to the Sale. The remaining cash will be retained for working capital. The Purchaser may seek to obtain third-party financing following the Closing. Any such financing, if obtained, is likely to be secured by accounts receivable and inventory of the Purchaser, including most or all of the Purchased Assets. INFORMATION CONCERNING BASE TEN SYSTEMS, INC. EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS PROXY STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS OR OUTCOMES TO BE MATERIALLY DIFFERENT FROM THOSE ANTICIPATED AND DISCUSSED HEREIN. IMPORTANT FACTORS THAT THE COMPANY BELIEVES MIGHT CAUSE SUCH DIFFERENCES ARE DISCUSSED IN THE CAUTIONARY STATEMENTS ACCOMPANYING THE FORWARD-LOOKING STATEMENTS IN THIS PROXY STATEMENT AND IN THE RISK FACTORS DETAILED IN THE COMPANY'S PREVIOUS FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. IN ASSESSING FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, READERS ARE URGED TO READ CAREFULLY ALL CAUTIONARY STATEMENTS CONTAINED IN THIS PROXY STATEMENT AND IN THOSE OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. SELECTED FINANCIAL DATA The following table presents selected financial data for Base Ten and its subsidiaries. The financial data for the fiscal years ended October 31, 1994 through October 31, 1996 have been derived from the Company's audited Consolidated Financial Statements included in this Proxy Statement and previously filed with the Securities and Exchange Commission on Form 10-K and 10-K/A. The financial data for the nine months ended July 31, 1996 and July 31, 1997 have been derived from the Company's unaudited Consolidated Financial Statements included in this Proxy Statement and previously filed with the Securities and Exchange Commission on Form 10-Q. In the opinion of management, all adjustments of a normal recurring nature necessary for a fair presentation of the financial statements are reflected therein. The results reflected in the unaudited statement of consolidated operations for the period ended July 31, 1997 are not necessarily indicative of the results to be expected for the entire year. All of such data should be read in conjunction with the other financial statements, related notes and other financial information included in this Proxy Statement. BASE TEN SYSTEMS, INC. AND SUBSIDIARIES (IN THOUSANDS EXCEPT PER SHARE DATA)
NINE MONTHS ENDED YEAR ENDED OCTOBER 31, --------------------------- ----------------------------------------------------- JULY 31, JULY 31, 1997 1996 1996 1995 1994 1993 1992 ------------- ------------ --------- --------- --------- --------- --------- INCOME STATEMENT DATA: Revenues................................. $ 9,941 $ 10,502 $ 14,891 $ 18,307 $ 19,282 $ 22,262 $ 19,068 Earnings (Loss) from continuing operations before income taxes and extraordinary item (1) (3)............. (7,245) (7,936) (10,006) (1,851) 59 1,465 695 Income taxes (benefit)................... -- -- (1,047) (474) 24 507 198 Earnings (Loss) from continuing operations before extraordinary item... (7,245) (7,936) (8,959) (1,377) 35 958 497 Extraordinary Item: Income tax/ benefit from utilization of loss carryforward........................... -- -- -- -- -- -- 198 Net earnings (Loss)...................... (7,245) (7,936) (8,959) (1,377) 35 958 695 Net earnings (Loss) per share............ (.92) (1.0) (1.16) (.20) .03 .17 .19
AS OF OCTOBER 31, ----------------------------------------------------- AS OF JULY 31, 1997 1996 1995 1994 1993 1992 ------------ --------- --------- --------- --------- --------- BALANCE SHEET DATA: Working capital...................................... $ 10,575 $ 13,916 $ 13,270 $ 5,860 $ 6,365 $ 1,858 Total assets......................................... $ 29,522 $ 30,348 $ 28,005 $ 17,609 $ 17,255 $ 13,054 Long term debt, net of current maturities (2)........ $ 19,213 $ 13,478 $ 3,525 $ 3,601 $ 3,212 $ 4,675 Shareholders' equity................................. $ 5,517 $ 12,091 $ 20,261 $ 9,431 $ 7,957 $ 1,974
- ------------------------ (1) Included in 1992 financial data is a reversal of $.5 million of a prior provision and a gain of $.4 million on previously written-off marketable securities. (2) Included in 1997, 1996, 1995 and 1994 financial data is a long term capital lease. (3) Included in 1996 financial data is a write-off of various capitalized expenses amounting to $2.4 million and $.6 million of expenses incurred in the preparation of a registration statement which was withdrawn. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company operates with a Medical Technology Division and a Government Technology Division and designs, develops, manufactures and markets complex and comprehensive software solutions for the pharmaceutical medical device manufacturing industries and precision electronic systems for the defense industry. The Company's products are used in safety critical applications requiring consistent, highly reliable outcomes where an out-of-specification event could have a catastrophic result. The Company developed a core competency in safety critical applications from its historical focus on designing electronic systems used primarily in weapons management systems for military aircraft. The Company has applied this expertise to develop PHARMASYST-Registered Trademark-, a computerized Manufacturing Execution System ("MES") used to automate, monitor, control and document highly regulated manufacturing processes. The Company has entered into collaborative relationships with certain computer system integrators and others that can integrate PHARMASYST-Registered Trademark- with the products and services they provide. The Company has not yet recognized any sales as a result of these relationships and cannot predict if or when such relationships will prove successful. The Company must complete further development work on PHARM2-TM-, which is an advanced version of the PHARMASYST-Registered Trademark- product, and must successfully conduct training of its partners to make such relationships effective. No assurance can be given that this will occur. Through the GTD, the Company develops and manufactures weapons management systems and other defense related products. See "The Government Technology Division," above. The Company experienced a net loss of $7.2 million in the nine months ended July 31, 1997, compared with $7.9 million in the nine months ended July 31, 1996, and net losses of $9.0 million in the year ended October 31, 1996, compared with $1.4 million in the year ended October 31, 1995. These losses resulted primarily from reduction of defense related revenues, write-offs and amortization of software development expenditures incurred in prior periods and expenses related to the marketing and sales of commercial products. The Company anticipates incurring additional losses in the fourth quarter of fiscal 1997 and the first half of fiscal 1998 and could continue to incur losses in subsequent periods. The Company's ability to achieve profitable operations is dependent upon, among other things, successful marketing of its manufacturing execution system products, and successful competition in the markets in which the Company participates. Failure of the PHARMASYST-Registered Trademark- product to achieve market acceptance would have a material effect on the Company's business, results of operations and financial condition. COMMERCIAL OPERATIONS. During 1996 the Company focused on the development of PHARM2-TM-, an advanced version of the PHARMASYST-Registered Trademark- product introduced in 1995. As of November 30, 1997, the Company had received 25 contracts or signed licensed agreements from manufacturers or their integrators for installation of systems at 38 sites, including Abbott Hospital Products, Berlex, Novo Nordisk, Pfizer International Products Group, Pharmacia & Upjohn, SmithKline Beecham, 3M, Taisei, and Wyeth. In the earlier part of the year, the Company added Roche, Astra, and an additional contract from Pharmacia & Upjohn. Although the Company has made eight deliveries of early releases of PHARM2-TM-, 10 other deliveries of PHARM2-TM- continue to be overdue. Deliveries have been delayed primarily because of the Company's failure to accurately estimate the time necessary to complete software enhancements to PHARM2-TM- required to meet individual customer requirements, including customer requirements revised by customers after initial bids were submitted or agreements signed. In order to maintain customer relations, the Company accepted responsibility for changes without requesting additional funding or extension of delivery dates. Although cancellation for late deliveries may occur, the Company does not currently anticipate the loss of material orders as a result thereof, but such failure to make necessary deliveries could adversely affect the Company's reputation. In order for the PHARM2-TM- business to grow, it will be necessary for the Company to increase its delivery rate and, since the end of the second quarter of 1997 the Company has increased its development staff by approximately 40% to overcome this shortcoming. Although required deliveries are planned no assurances can be given that they will take place in a timely manner. One effect of further delayed deliveries would be to negatively impact the Company's cash flow, which could limit the Company's ability to grow. The timing of revenues from MES can be affected by factors outside the Company's control, including long sales cycles and delays in customer authorization procedures. The Company sells PHARM2-TM- through direct salespersons operating from its headquarters in New Jersey; St. Louis, MO; Camberley, England; Brussels, Belgium; Copenhagen, Denmark; and Tokyo, Japan. The Tokyo office was opened in January 1997 in response to opportunities in the Pacific Rim. In addition to direct selling, the Company has developed relationships with implementers and integrators already active in this market to increase the number of opportunities available to it to demonstrate and offer its products. The Company requires additional sales persons to grow and has, as of yet, not been able to find suitable candidates at compensation levels consistent with the Company's limits. Failure to add to the staff could negatively impact revenues. During the 1997 first quarter, the Company engaged Drumbeat Dimensions, Inc. an internationally recognized consulting organization, to assist it in the further development and refinement of procedures and documentation for the Company in order to be fully compliant with the principles embodies in GAMP and the Company believes it is currently in full compliance with such GAMP principles. GAMP is the output of an industry group defining the methodology for creation of software products for the pharmaceutical industry. Although no assurances can be given, the Company believes that this provides added value to the Company's ability to sell in this market and this should further differentiate the Company from its competition. The Company has also strengthened its quality assurance organization through the employment of personnel familiar with pharmaceutical manufacturing practice. In February 1997, the Company announced the validation of the Dispensing module of PHARMASYST-Registered Trademark- at the Canadian manufacturing facility of a major pharmaceutical company, one of the Company's principal clients. The Company believes that the value of validation will be realized in increased acceptance of the Company's products by other pharmaceutical companies. Although the Company generates certain revenue upon delivery of PHARM2-TM- to its clients, it is necessary for a pharmaceutical company to validate its equipment and processes in order to satisfy FDA regulations and PHARM2-TM- is a critical portion of the manufacturing activity. The Company announced its first validated site in October 1996 for a major pharmaceutical company manufacturing medical devices. The Company hopes to add four to six more validated sites by the end of January 1998, although any such accomplishment is dependent on customer cooperation. During the nine month period ended July 31, 1997, the Company strengthened its technical resources through the addition of development staff in both Camberley, England, and in its New Jersey headquarters, and in its opinion must continue to do so to meet its delivery commitments and to accommodate expected growth. The Company considers its technical staff to be a primary resource and crucial to its continuance in this business area. Loss of any portion of its technical resources would be injurious and loss of a significant portion of its technical staff could cause serious and immediate damage to the Company's business. The Company believes it has good relations with its technical staff. DEFENSE OPERATIONS. During the 1997 nine month period the Company concentrated on the development tasks related to the Interference Blanker Unit (IBU) awarded to the Company in mid-1996, the development tasks related to the Maintenance Data Recorder also awarded to the Company in mid-1996, and the development tasks related to the SLAM ER missile contract awarded in October 1996. This activity involved primarily technical staff and was responsible for a major part of the income generated by the Government Technology Division in this period. In the month of August, the Company completed the environmental qualification of its Maintenance Data Recorder which the Company believes will increase the sales opportunities for this product. Development effort on the IBU has proceeded on schedule. The development work on the SLAM-ER missile is currently behind schedule although the Company hopes to achieve recovery to schedule within the next months. In addition, the Company continued its development of additional software for the Stores Management System used aboard the Tornado aircraft. The Tornado program extends beyond the year 2000 and could offer the Company significant additional business. The Company recently provided cost and pricing information for additional production for the Tornado Stores Management System and has recently been advised that the customer anticipates placing an $11.4 million order before the end of 1997. The award of this contract is dependent on, among other factors, the defense budget of the German government. Efforts to secure the released funds for this contract have been unsuccessful in the past due to budget allocations for other priorities and there currently can be no assurance of the award of such contract. The Company continues to seek additional sources of business in the weapons control area concentrating on those opportunities where the Company's technical skills are relevant. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JULY 31, 1997 COMPARED TO THE NINE MONTHS ENDED JULY 31, 1996 Total revenues decreased by $0.6 million or 5.7%, from $10.5 million in the nine months ended July 31, 1996 to $9.9 million in the same period in 1997. Revenues from defense operations decreased by $1.6 million or 16.3%, to $8.2 million for the nine months ended July 31, 1997 compared with revenues of $9.8 million in the same period in 1996. Commercial revenues increased by $0.4 million or 36.4% from $1.1 million in the nine months ended July 31, 1996 to $1.5 million in the same period in 1997. The decline in defense revenues was due in part to lower order writing caused by delays in government funding, administrative delays in issuing contracts and reduced contract values due to competitive pressures. The increase in commercial revenues primarily resulted from deliveries of early releases of standard versions of PHARM2-TM- as well as the completion of certain portions of enhancements on the percentage completion method. The PHARM2-TM- development effort is no longer being capitalized since initial deliveries have taken place and all further enhancements to the functionality of the basic product are being expensed, which negatively impacts earnings. The Company incurred a net loss of $7.2 million in the nine months ended July 31, 1997 compared with a loss of $7.9 million in the comparable period in 1996. The loss in 1997 was due to reduced order bookings in the Government Technology Division resulting in lower revenues without a corresponding decrease in overhead or selling, general, and administrative costs. In addition, the development contracts which the Company has accepted in anticipation of future production were bid aggressively and have a high cost relative to realized revenue. These contracts will not be complete until 1998 and the effect of this aggressive bidding will continue to affect revenues. The effect on earnings is a function of what additional revenues the Company can develop from other contracts yet to be booked. There was not sufficient revenue developed by the MTD to offset the continuing marketing and sales costs as well as the additional administrative costs necessary to support the development process. The loss in the nine months ending July 31, 1997 was also due to interest expense of $1.1 million and amortization of capitalized software of $1.1 million, compared to $0.3 million and $0.8 million respectively for the 1996 period. Interest in succeeding periods will increase further due to interest on the $5.5 million of Convertible Debentures since only two months of interest charges were incurred in the third quarter of 1997. The Company expects to incur additional operating losses in the 1997 fourth quarter, and the first half of fiscal 1998, and could be expected to incur further losses in succeeding quarters, particularly if currently anticipated orders do not materialize in the amounts required on a timely basis, or if the Company does not complete its current orders on schedule. While the Company is actively making proposals to its customers for new business, the Company has no ability to control government funding or budgeting processes; and is subject to unpredictable timing of capital authorizations required by its customers to purchase its PHARM2-TM- products. The Company intends to add to its sales capability so as to increase the number of selling opportunities in an effort to reduce the effect of funding and contract placement delays. Cost of sales increased by $0.6 million from $7.7 million or 73.1% of revenues in the nine months ended July 31, 1996 compared to $8.3 million or 83.8% of revenues in the nine months ended July 31, 1997. The cost of sales in the 1997 period increased relative to revenues due primarily to increases in direct and contract labor and the increase in overhead salaries. In the nine months ended July 31, 1997 the direct labor cost was $4.4 or 44.4% of revenues compared with a direct and contract labor cost of $3.0 million or 28.6% of revenues in the nine months ended July, 1996. In the nine months ended July 31, 1997 the overhead salaries were $2.5 million or 25% of revenues compared with $1.6 million or 15.2% of revenues in the comparable period in 1996. Although the cost of direct and contract labor and overhead salaries were greater in the period ending July 31, 1997 compared with the same period in 1996, the increase in capitalized software in 1997 was $3.5 million compared to $2.3 million in the comparable period in 1996 thus reducing the effect of the increase in labor and overhead. Since the design of PHARM2-TM- was essentially completed in the period ending April 30, 1997, capitalization in the three months ending July 31, 1997, and in future periods, will be substantially reduced thus having an adverse effect on the future cost of sales. Such an adverse effect can only be overcome by an increase in revenues through deliveries of PHARM2-TM- and associated customization income. The cost of sales was reduced by the difference in purchased material due primarily to the reduced sales of the GTD. In the nine months ending July 31, 1997 purchases amounted to $1.5 million compared with $2.0 million in the nine months ending July 31, 1996. Selling, general and administrative expenses increased by $0.1 million, from $7.1 million or 67.6% of revenues in the nine months ending July 31, 1996 to $7.2 million or 72.7% of revenues in the nine months ended July 31, 1997. The increase was due, in part, to an increase of $0.3 million in amortization costs of capitalized software for the MTD. The cost of amortization in the nine months ended July 31, 1996 was $0.8 million and in the nine months ended July 31, 1997 the cost of amortization was $7.7 million. Professional fees in the nine months ending July 31, 1996 were $0.8 million, reflecting in part the cost of preparing a registration statement for the sale of securities which was later withdrawn. Professional fees in the nine months ending July 31, 1997 were $0.3 million. Selling salaries in the nine month period ending July 31, 1997 were $1.0 million compared with $0.6 million in the comparable period in 1996. Costs of consulting, advertising, general and administrative salaries, group life insurance, and personnel hiring were all higher in the nine months ended July 31, 1997 than in the comparable period in 1996. Miscellaneous general and administrative costs were greater in the nine months ended July 31, 1996 than in the comparable period in 1997 by $0.5 million. Research and development expenses declined from $0.8 million in the nine months ended July 31, 1996 to $0.5 million in the nine months ended July 31, 1997 due to a reduction of engineering investment in new product design for the GTD. LIQUIDITY During the nine months ended July 31, 1997, the Company had a net reduction of cash of $3.7 million. The use of cash for operations was due primarily to the Company's expenditure of approximately $2.4 million net of amortization for the development of its PHARMASYST-Registered Trademark- products and the Company's net loss of $7.2 million for the nine months. Cash used in investing activities during the third quarter of $0.5 million was due primarily to the purchase of property, plant and equipment. Net cash provided from financing activities was attributable to the exercise of options and warrants for the purchase of the Company's Common Stock as well the net proceeds from the issuance of the Company's $5.5 million Convertible Debentures. The combined use of cash from all activities during the quarter was $3.7 million. At July 31, 1997 the Company's cash and billed receivables were $6.8 million. The Company has a $1 million line of credit facility with a local bank which expires in February 1998. Interest is 1% above the bank's prime lending rate and the credit line is collateralized by accounts receivable. There currently are no amounts outstanding under the credit line. On May 1, 1997, the Company entered into an agreement whereby it became a minority owner of uPACS LLC, a limited liability company (the "LLC"). Under the terms of the agreement, the Company made a capital contribution to the LLC of its rights to its uPACS-TM- technology which is a system for archiving ultrasound images with networking, communication and off-line measurement capabilities. In exchange for such capital contribution, the Company received a 9% interest in the LLC. An outside investor made a capital contribution of $2 million and agreed to make a further capital contribution of $1 million on or before December 1, 1997, in return for a 91% interest in the LLC. The Company believes that the funds available under the LLC will be sufficient to fund operations in connection with uPACS-TM- for approximately 18 months. In connection with the formation of the LLC, the Company entered into a Services and License Agreement whereby the Company has agreed to complete the development of the uPACS-TM-technology and undertake to market, sell and distribute systems using the uPACS-TM- technology. The LLC will pay the Company its expenses in connection with such services and the Company will pay to the LLC royalties in connection with the sale of systems using the uPACS-TM- technology. At such time as the LLC has distributed to the outside investor an aggregate amount equal to $4.5 million of its net cash flow, the Company would become a 63% owner of the LLC and the outside investor will own a 37% interest in the LLC. There can be no assurance that uPACS-TM- will be successful or that the LLC will operate profitably or that the funds under the LLC will be sufficient for the further development and marketing of uPACS-TM-. The Company cannot predict if or when uPACS-TM- sales will commence in its updated versions. There is intense competition in this market and the Company has not established its market position. The Company anticipates difficulty in achieving such sales until further product development is complete and market tested. On May 30, 1997, the Company sold 55 units ("Units") at $100,000 per Unit, for an aggregate of $5,500,000, to two accredited purchasers ("Purchasers") in a private offering (the "Offering"). Each Unit consisted of (i) a convertible debenture ("Convertible Debenture") in the principal amount of $100,000, convertible into shares of the Company's Class A Stock, and (ii) a warrant ("Warrant") to acquire 1,800 shares of Class A Stock. The number of shares of Class A Stock issuable upon conversion of the Convertible Debentures is variable. The number of shares will be calculated at the time of conversion and will be the lesser of (i) the product obtained by multiplying (x) the lesser of the average of the closing bid prices for the Class A Stock for the (A) five or (B) thirty consecutive trading days ending on the trading day immediately preceding the date of determination by (y) a conversion percentage equal to 95% with respect to any conversions occurring prior to February 24, 1998 and 92% with respect to any conversions occurring on or after February 24, 1998 and (ii) $13.50 with respect to any conversions occurring prior to May 30, 1998 or $14.00 with respect to any conversions occurring on or after May 30, 1998. The Convertible Debentures are not convertible prior to December 16, 1997. From December 16, 1997 until February 23, 1998, one-half of the Convertible Debentures may be converted and after February 23, 1998, the Convertible Debentures are fully convertible. The Warrants may be exercised at any time through May 30, 2002 at an exercise price of $12.26 per share. The Company received net proceeds of approximately $4,950,000 from the sale of the Units after deduction of fees and expenses related to the Offering. During fiscal 1996, the Company used $9.5 million of cash in its operations. The use of cash was due primarily to an increase of $1.5 million in accounts receivable, the Company's expenditure of approximately $3.8 million for the development of its PHARMASYST-Registered Trademark- products, and the Company's net loss for the year. During fiscal 1996, the Company raised $10.0 million from the sale of a 9.01% convertible debenture maturing in 2003 and $806,000 from the exercise of outstanding options. During fiscal 1996, the Company's cash and equivalents increased approximately $.3 million from $7.2 million at October 31, 1995 to $7.5 million at October 31, 1996, primarily due to $10.0 million of cash generated by financing activities, partially offset by $9.5 million of cash used in operations and $1.1 million of additions to property, plant and equipment. The Company's net loss of $9.0 million for the year ended October 31, 1996 included noncash expenses consisting of a write-off of capitalized software development costs aggregating approximately $2.4 million and additional write-offs of $.3 million relating to other costs and capitalized items, as well as depreciation and amortization expense of $1.7 million for the period, including $1.3 million in amortization of capitalized software development costs. LIQUIDITY AND CAPITAL RESOURCES FOLLOWING THE SALE. The Company believes that cash generated by operations and existing capital resources in combination with the net proceeds from the Sale, its credit facility, the funds available from the LLC, the net proceeds from the sale of the Convertible Debentures issued in May 1997 and anticipated collections on its outstanding receivables will be sufficient to fund its operations through the third fiscal quarter of 1998. In July, 1997 the Company entered into an engagement with Cowen to act as the Company's financial advisor. The Company has closed the initial installment of a private placement of convertible preferred stock which, if fully consummated will result in receipt of net proceeds of approximately $17 million, an amount the Company believes will provide it with sufficient resources for both current operations and expansion of the MTD for at least the next 12 months. See "The Proposed Issuance", below. The Company is working with Cowen to develop additional capital for use in 1998. The Company is also relying on receiving anticipated orders for its products. In addition, the Company is relying on the continued successful enhancement of its MTD's leading product, PHARM2-TM-, during the fourth quarter of calendar 1997 to stimulate new orders and permit the delivery of existing orders. However, neither the completion of PHARM2-TM- nor the resulting generation of cash from orders can be assured either in time or amount or that such amounts will be sufficient for the Company's needs. If the Company should not receive such additional capital funding for fiscal 1998, or should the Company not receive the anticipated orders in time and in the amounts planned during fiscal 1998 the Company would need to reduce its operating costs. The effect of these reductions could have an adverse affect on the Company's ability to market, develop, and implement its products with the result that the Company's losses could continue or increase. RESULTS OF OPERATIONS FOR FISCAL 1996 COMPARED TO FISCAL 1995 The Company incurred a net loss of $9.0 million in 1996 compared to a net loss of $1.4 million in 1995. Losses in 1996 comprised a write off of various capitalized expenses in the sum of $2.4 million representing development of the Company's prenatal abnormality detection software, PRENVAL, and early development costs for uPACS-TM- and other operating losses of $7.0 million. The major portion of the operating loss reflects the Company's investment in the development of markets and infrastructure for MTD products. Included in the loss was approximately $.6 million of expenses incurred in the preparation of a registration statement which was withdrawn. Revenues for the twelve months ended October 31,1996, were $14.9 million compared with $18.3 million in 1995, a decrease of 18.6%. In addition to minimal revenues from its MTD, the decrease is attributable to a decline in defense spending resulting in fewer opportunities to bid with the consequent reduction in contract awards. Anticipated orders for the Company's Bus Interface Unit did not materialize and other orders for build to print contracts were $2.2 million in 1996 compared with $4.8 million in 1995. New business in the form of engineering contracts for Maintenance Data Recorders and Interference Blanking Units received from McDonnell Douglas in the middle of the year resulted in revenues during the third and fourth quarters only. Engineering contracts for both software and hardware development of defense related products accounted for approximately 26% of revenues. Production of proprietary weapons control products for international customers accounted for approximately 24% of revenues and production of proprietary and build to-print defense related products for national customers accounted for approximately 40% of revenues. Medical Technology products accounted for approximately 8% of revenues, with the balance of revenues derived from miscellaneous sources. Revenues from the MTD products declined from $2.2 million in 1995 to $1.3 million in 1996. In 1995, $1.8 million in revenue was recognized upon completion of the Company's PRENVAL software sold and licensed to Johnson & Johnson Ortho Clinical Diagnostic Systems, with approximately $.4 million in revenue from the Company's PHARMASYST-Registered Trademark- products. The Company began to recognize revenue only upon delivery of PHARMASYST-Registered Trademark- products at the end of the fiscal 1996 second quarter and consequently these products produced only minimal revenue in the third and fourth quarters. Cost of sales as a percent of revenues was 73.7% in 1996 compared with 64.5% in 1995. The increase is due primarily to overhead expenses for the development of PHARMASYST-Registered Trademark-. These additional expenses, in the absence of appreciable revenues, increased cost of sales as a percent of revenues. Increases in staffing levels for the MTD included project management staff and the indirect costs of the larger development and testing groups. Direct labor increased from $3.3 million in 1995 to $4.9 in 1996 due primarily to increases in the development and testing staff dedicated to the PHARMASYST-Registered Trademark- project. Research and development costs increased to $1.0 million from $.9 million in 1995. These charges which represent investments in defense related products are separate from the $3.8 million in capitalized costs for the development of PHARMASYST-Registered Trademark- products in 1996. Capitalized costs in 1995 of $2.3 million consisted primarily of development costs for PHARMASYST-Registered Trademark- and uPACS-TM-, both MTD products. Efforts to accelerate the market development of PHARMASYST-Registered Trademark- and uPACS were recorded as selling, general and administrative expenses rather than research and development costs. Selling, general and administrative costs for 1996 increased to $8.5 million compared with $6.3 million in 1995. Included in the 1996 expenses are the costs of financing totaling $.6 million incurred in the preparation of a registration statement in anticipation of a prospective public offering. The offering was withdrawn in July 1996 because of market conditions. The Company did not have comparable costs in 1995. The largest single increase in selling, general and administrative expenses for 1996 was in personnel costs rising from $1.8 million in 1995 to $2.8 million in 1996, an increase of 55.6%. This increase includes additional sales persons. Also, additional costs in 1996, attributable largely to the MTD, for personnel hiring, travel, advertising, and consulting amounted to an increase of approximately $.5 million compared to 1995. The amortization of capitalized expenses relating primarily to the development of PHARMASYST-Registered Trademark- and uPACS increased to $1.3 million in 1996 from $.6 million in 1995. Interest expense in 1996 was $.7 million representing primarily capitalized lease costs incurred under a sale and lease back transaction involving sale of the Company's facility in Trenton, New Jersey in October 1994 and less than three months interest costs applicable to the $10.0 million convertible debenture issued in August, 1996. Interest expenses in 1995 of $.6 million represented the capitalized lease costs and the mortgage loan outstanding during 1995. Cost increases in personnel and related costs which were incurred in 1996 were incurred over only a part of the year and may be expected to increase in 1997 as they become applicable to the full year. RESULTS OF OPERATIONS FOR FISCAL 1995 COMPARED TO FISCAL 1994 Total revenues declined by $975,000, or 5.1%, from $19.3 million in fiscal 1994 to $18.3 million in fiscal 1995. Revenues from defense-related operations declined by $3.1 million, or 16.6%, from $18.7 million to $15.6 million. Revenues from commercial operations were $2.2 million in 1995. There were no commercial revenues in 1994. The decline in defense revenues reflects reduced defense budgets in the U.S. and Western Europe and was partially offset by a $2.3 million increase in contract manufacturing revenues related to the commencement of a manufacturing contract. Defense revenues accounted for 85.2% and 97.0% of total revenues during 1995 and 1994, respectively. Revenues from commercial operations consisted of royalties generated from sales of PRENATA and $500,000 of initial sales of PHARMASYST-Registered Trademark-. During 1995, the Company licensed certain medical screening technology to Johnson & Johnson Clinical Diagnostic Systems for use in its PRENATA medical screening kit and entered into a corresponding five year royalty agreement. Using the percentage-of-completion method, the Company recognized revenues of $1.8 million in 1995, representing the aggregate minimum royalty payments due under the agreement. Commercial product revenues accounted for 12.3% of total revenues during 1995. Cost of sales declined by approximately $1.2 million, or 9.1%, from $13.0 million in 1994 to $11.8 million in 1995. The decline was attributable to the decline in total revenues. Gross margin increased from 32.6% to 35.5%. This increase is attributable to approximately $2.2 million of sales of relatively high margin PRENATA and PHARMASYST-Registered Trademark- products during 1995. Selling, general and administrative expenses increased by approximately $.7 million, or 13.0%, from $5.1 million in 1994 to $5.8 million in 1995 and increased as a percentage of revenues from 26.6% to 31.7%. This increase consisted primarily of (i) $.4 million in salaries relating to the addition of new sales personnel, (ii) $.1 million in advertising of commercial products and (iii) $.3 million in travel expenses relating to the addition of new sales people and increased participation in trade shows. The increase was partially offset by a $.2 million decrease in employee group insurance expenses relating to the adoption of a new plan. Research and development expenses declined by $24,000, or 2.7%, from $887,000 in 1994 to $863,000 in 1995 and remained relatively constant as a percentage of revenues. Capitalization of software development costs increased by approximately $1.3 million, or 81.3%, from $1.6 million in 1994 to $2.9 million in 1995. This increase consisted primarily of $570,000, $460,000 and $410,000 in increased capitalization of development costs relating to PHARMASYST-Registered Trademark- , uPACS and a weapons control system, respectively, partially offset by lower development costs related to PRENVAL. Interest expense increased by $345,000, or 165.1% from $.2 million in 1994 to $.5 million in 1995 and increased as a percentage of revenues from 1.1% to 3.0%. This increase was primarily due to the 1994 mortgage interest being replaced in 1995 by capital lease amortization pursuant to the October 1994 sale and leaseback of the Company's principal facility, resulting in higher levels of borrowings. The Company's revenues and operating results are subject to significant quarterly fluctuations. Factors that could cause such fluctuations include the time of revenue recognition; changes in customer capital and resource commitment; changes in product mix; the introduction of new products or product improvements by the Company or its competitors; FDA regulation requirements and changes in operating expenses. The timing of revenues from defense-related programs can be significantly affected by government procurement processes and disruptions due to political and other events over which the Company has no control The timing of revenues from manufacturing execution systems can be affected by factors outside the Company's control, including long sales cycles and delays in customer authorization procedures. BUSINESS The Company operates with a Medical Technology Division ("MTD") and a Government Technology Division ("GTD"). See "The Proposed Sale of the Government Technology Division--The Government Technology Division," above, for a description of the GTD. The MTD, which will constitute the Company's sole operations following the Sale, designs, develops, manufactures and markets comprehensive software solutions for the pharmaceutical and medical device manufacturing industries. The Company's products are used in safety critical applications requiring consistent, highly reliable outcomes where an out-of-specification event could have a catastrophic result. The Company developed a core competency in safety critical applications from its historical focus on designing electronic systems used primarily in weapons management systems for military aircraft. The Company has applied this expertise to develop PHARMASYST-Registered Trademark-, a computerized MES used to automate, monitor, control and document highly regulated manufacturing processes. The following describes the MTD. OVERVIEW PHARMASYST-Registered Trademark- operates on a PC-based system in an open client / server environment and can be readily integrated with industry standard server database engines. PHARMASYST-Registered Trademark- is designed and marketed as a standard application, not a custom solution or toolkit, for implementation into a customer's existing manufacturing facility. PHARMASYST-Registered Trademark- acts as an electronic monitor ensuring that the production process complies with a predefined set of specifications in order to produce a consistent product. The Company believes that PHARMASYST-Registered Trademark- is a premier commercially available PC-based standardized MES solution capable of the necessary functionality and supporting documentation suitable for regulated manufacturing in the pharmaceutical and medical device industries. The Company is engaged in a continuing program to maintain compliance with an industry generated standard for Good Automated Manufacturing Practice (GAMP) as a means of differentiating itself from present and future competition. The production of pharmaceuticals is subject to the FDA's current Good Manufacturing Practices (cGMP), which mandate compliance with technical requirements involving manufacturing production processes. During its inspections, the FDA frequently verifies whether a manufacturer is in compliance with cGMPs. PHARMASYST-Registered Trademark-, through the Company's program of meeting GAMP requirements, is intended to support the manufacturer's verification of a compliant production process in a manner which the Company believes is acceptable to the FDA. PHARMASYST-Registered Trademark- offers four manufacturing applications: dispensing, electronic batch recording, inventory control, and document management, collectively encompassing much or all of a typical pharmaceutical production process. During 1996 the Company focused on the development of PHARM2-TM-, an advanced version of the PHARMASYST-Registered Trademark- product introduced in 1995. As of November 30, 1997, the Company had received 25 contracts or signed license agreements from manufacturers or their integrators for installation of systems at 38 sites, including Abbott Hospital Products, Berlex, Novo Nordisk, Pfizer International Products Group, Pharmacia & Upjohn, SmithKline Beecham, 3M, Taisei, and Wyeth. In the earlier part of the year, the Company added Astra, Roche, and an additional contract from Pharmacia & Upjohn. The Company has entered into collaborative relationships with certain computer system integrators and others that can integrate PHARMASYST with the products and services they provide. The Company has established a relationship with STG-Coopers and Lybrand Consulting AG, Walsh Automation (a Canadian systems integrator), WTI Systems Ltd. (an English systems integrator), Toyo Engineering Co. (a Japanese developer of turnkey manufacturing facilities), Bailey Controls Company (a provider of distributed control systems), Intellution, Inc. (a supplier of manufacturing systems for the pharmaceutical industry), the Taisei Corporation (a construction and engineering company in Japan), Peat Marwick KPMG, QAD, (a manufacturer of manufacturing resource planning software), Euriware ( a French systems integrator) and Wonderware (a provider of manufacturing software). MANUFACTURING EXECUTION SYSTEMS Manufacturing execution systems are designed to create uniformity in a production sequence by defining the elements of each production step. MES essentially institute a checklist to be followed, defining the raw material inputs, equipment operating instructions, and procedures to be followed in order to maintain consistency in an end product. Historically, manufacturers have implemented MES using paper forms that follow a batch through the production sequence, requiring signatures to verify that procedures were followed according to defined procedures. Paper based systems are generally inadequate in enforcing strict manufacturing procedures, rendering such systems susceptible to human errors, leading to an increased possibility of corrupted batches. The production of certain products effecting health and safety, such as pharmaceuticals and some consumer products, require greater production process control to decrease the possibility of a corrupted end product. To obtain greater control and increase efficiency, manufacturers have incorporated custom computer solutions into their MES. These solutions are expensive, time consuming to implement, address only limited procedures and generally do not possess the flexibility for expansion or the addition of new technologies. The Company believes there is a compelling and immediate need for the pharmaceutical and medical device industries to implement MES that facilitate the demonstration of compliance with FDA cGMP regulations and that these industries are actively seeking suppliers and products to aid in compliance. The products themselves must be developed and proven under rigid controls and procedures in compliance with currently accepted industry standards for validation. In addition, the Company believes pharmaceutical and medical device manufacturers are subject to pressures to reduce manufacturing costs in anticipation of the expiration of U.S. patents and the emergence of competing generic drugs and pricing pressures imposed by large retail organizations and Healthcare providers who seek bulk purchases at favorable prices. THE COMPANY'S MES SOLUTION PHARMASYST-Registered Trademark- enables the customer to specify the individual steps of the production process. PHARMASYST-Registered Trademark- interfaces with Manufacturing Resource Planning (MRP) and Supervisory Control and Data Acquisition (SCADA) systems, information databases and stand-alone production machinery such as scales, blenders and ovens, directing the execution of the production process and continuously monitoring the compliance of each step with the manufacturer's defined specifications. Should PHARMASYST-Registered Trademark- recognize an out-of-specification event, it can adapt to that by selecting a previously defined and approved alternative procedure in order to allow the process to continue in a compliant manner. If a remedial alternative is not available, PHARMASYST-Registered Trademark- will not authorize commencement of the next production step and can issue a problem notification to supervisory or quality control personnel. In addition, PHARMASYST-Registered Trademark- chronologically tracks and electronically records each input, procedure and output, which provides a powerful tool for the customer to demonstrate ongoing cGMP compliance. The following are basic features of the PHARMASYST-Registered Trademark- MES system: - Executes workflow instructions, including recipes and equipment operating instructions; - Confirms proper execution of procedures; - Monitors material flow throughout the entire manufacturing process; - Verifies testing of intermediate and final products and monitors adherence to quality standards; - Authorizes progression to the next production step if all events were completed to specification; and - Provides comprehensive real time documentation for each event. PHARMASYST-Registered Trademark- provides a standard set of MES applications, not custom systems or system design services. The Company is able to provide customers with a fixed price quotation and estimated delivery schedule based upon an extensive evaluation of user requirements. The Company believes such specificity provides a significant advantage over custom MES solutions that have been characterized by long development and installation schedules and unpredictable costs. The Company commenced sales of PHARMASYST-Registered Trademark- in fiscal 1995 and is installing applications at facilities operated by Abbott Laboratories Hospital Products Division, Bayer Inc., Instrument Laboratories, Novo Nordisk, Pfizer Inc. International Pharmaceuticals Group, SmithKline Beecham, and Taisei. As of November 30, 1997, the Company had received 25 contracts or signed license agreements from manufacturers or their integrators for installation of systems at 38 sites, including Abbott Laboratories Hospital Products, Astra, Berlex, Novo Nordisk, Pfizer International Products Group, Minnesota Mining & Manufacturing, Roche, Taisei, SmithKline Beecham, and Pharmacia & Upjohn. PHARMASYST-Registered Trademark- normally requires only limited customization for incorporation into existing systems. Based upon orders to date, the Company estimates that a typical PHARMASYST-Registered Trademark- site installation costs between $150,000 and $300,000 and requires six to nine months to install, depending in part on the time necessary for the customer to solidify its requirements. The Company has integrated the PHARMASYST-Registered Trademark- applications into a single MES product, referred to as PHARM2-TM-. PHARM2-TM- also interfaces with more database engines and operating systems than earlier PHARMASYST-Registered Trademark- applications, providing increased flexibility and limiting the customization required for an installation. The Company is continuing to enhance the functionality of PHARM2-TM-. OTHER PRODUCTS ULTRASOUND IMAGING PRODUCTS. In 1994, the Company introduced uPACS-TM-, a system for archiving ultrasound images. That system digitizes, records and stores ultrasound images on CD-ROMs as an alternative to existing film and video storage systems. In April 1996, the Company determined that uPACS-TM- was not a commercially viable product, despite anticipated 510(k) premarket clearances that were subsequently granted in June 1996. The Company is developing a new system for archiving ultrasound images with networking, communication, and off-line measurement capabilities. The Company is marketing this new system under the uPACS-TM- name and has received orders for approximately $300,000 of this new system. See the discussion of the uPACS LLC under "Liquidity" above. MEDICAL SCREENING SOFTWARE. The Company has created three software programs to aid in the prenatal detection of risk for certain birth defects. The first two programs are designed to accelerate the computation of risk detection for neural tube defects (PRENVAL I) and Down's syndrome (PRENVAL IA) in pregnant women. A portion of the third program was sold and the remainder licensed to the Johnson & Johnson Clinical Diagnostic Division ("Johnson & Johnson"), located in Amersham, England. Johnson & Johnson offers this software as PRENATA, a trademark of Johnson & Johnson, in connection with the sale of its products used in the detection of fetal abnormalities throughout the world, except for the United States. The Company's agreement with Johnson & Johnson provides for guaranteed minimum royalties for a period of five years beginning October 1994. The aggregate minimum royalties of $1.8 million collectable for 1995 through 1999 were earned in fiscal year 1995. The Company has terminated further self-funded development efforts of these products because the Company believes that the market and further revenue potential of the products does not currently justify the cost of further development. RESEARCH AND DEVELOPMENT The Company's commercial product development efforts are currently directed at the continuing development of PHARM2-TM- and a new image archiving system to be marketed under the uPACS-TM- name. The Company believes that commercial success in the MES and other markets will depend on its ability to provide product improvements or version upgrades. Consequently, the Company intends to continue to devote significant resources to developing product upgrades. The Company has developed concepts for certain "regulatory implementation" software intended to verify in real-time that a computer involved in critical applications is functioning as intended and that certain critical tasks are being performed within specified parameters. It has also developed certain concepts to provide software authors and programmers an environment for developing safety-critical software. During fiscal 1994, 1995 and 1996, the Company capitalized $1.5 million, $2.3 million and $3.8 million of software development costs related to the MTD, and expensed approximately $.9 million, $.9 million, and $1.0 million, in research and development expenditures, respectively, related to the MTD. The MTD's research and development staff consists of approximately 53 engineers and designers. COMPETITION The MES software market is intensely competitive and subject to rapid change. The principal competitive factors in this market include product functionality and quality, ease and speed of implementation and use, total cost, process manufacturing expertise, customer service and satisfaction, supported hardware and software platforms, the underlying technology and architecture of the product, vendor reputation and the ability and experience to document the software design life cycle to accepted industry validation standards. The Company believes that it competes effectively with respect to these factors, although it may be at a disadvantage against companies with greater financial, marketing, and technical resources. The Company's competitors for MES software include Consilium, Incode, SAP AG, Intellution, Inc. and ProPack GmbH. While the Company believes that PHARMASYST-Registered Trademark- is the premier commercially available, comprehensive standardized PC-based MES solution capable of the necessary functionality and supporting documentation suitable for regulated manufacturing found in the pharmaceutical and medical device manufacturing industries, many of these competitors offer products that provide specific MES applications, or toolkits that can be used for internal system development. Consilium offers FlowStream, an MES developed for the highly regulated pharmaceutical and bulk chemical manufacturing industries. In addition, the Company competes with system integrators and internal corporate MIS departments. The Company believes that internal MIS departments, which are responsible for developing and operating a manufacturer's management information systems and who are instrumental in the approval process for PHARMASYST-Registered Trademark-, provide a significant source of competition. Competition among providers of software for manufacturers is likely to increase substantially for many reasons. The Company also expects that competition will increase as a result of software industry consolidations. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of the Company's prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. There can be no assurance that the Company will compete successfully with new or existing competitors or that competitive pressures faced by the Company will not materially and adversely affect its business, results of operations and financial condition. BACKLOG Commercial software backlog related to PHARMASYST-Registered Trademark- products as of July 31, 1997, was approximately $4.5 million, compared with $3.9 million as of July 31, 1996. At fiscal 1996 year end, $4.1 million, or nearly 36% of the Company's backlog, was related to PHARMASYST-Registered Trademark- product orders with the remainder associated with the defense business. PROPRIETARY RIGHTS The Company regards its software as proprietary and attempts to protect it with copyrights, trademarks, trade secret law, and contractual arrangements. However, existing copyright laws offer only limited practical protection for software. Furthermore, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. Under certain circumstances, customers of the Company may be entitled to limited access of the PHARMASYST-Registered Trademark- source code. Customer access to source code may increase the possibility of misappropriation or other misuse of the Company's software. Accordingly, it may be possible for unauthorized third parties to copy certain portions of the Company's software or to obtain and use information that the Company regards as proprietary. There can be no assurance that the Company's means of protecting its proprietary software will be adequate or that competitors will not independently develop technologies similar to the Company's. The Company has obtained a patent for a portable memory device that may be integrated into future PHARMASYST-Registered Trademark- products, a patent for technology relating to its PRENVAL software, three patents covering elements of its regulatory implementation software technology, and a patent for a device relating to the fusing of rockets. In addition, the Company has filed applications for a patent covering certain aspects of the safety critical technology in PHARMASYST-Registered Trademark- and for several patents covering elements of its imaging technology. While the Company has received certain patent protection, there can be no assurances that any additional patents will be issued, that the scope of any patent protection will be adequate, or that any current or future issued patents will be held valid if challenged. The Company believes that its products and technology do not infringe any existing proprietary rights of others, although there can be no assurance that third parties will not assert infringement claims in the future. REGULATIONS The Company's PHARMASYST-Registered Trademark- software products do not require FDA clearance or approval at this time although the Company anticipates that such approval may be required in the future. However, those products are intended to facilitate compliance by pharmaceutical manufacturers with the FDA's cGMP regulations and are designed to be integrated into a manufacturer's production systems. A pharmaceutical manufacturer's systems, including any PHARMASYST-Registered Trademark- applications used, must be capable of sufficiently documenting the production of each batch of product to be in compliance with cGMP. Further, the manufacturer must be able to demonstrate to the FDA that its systems have that capability under a variety of circumstances. The Company is engaged in a continuing program to maintain compliance with Good Automated Manufacturing Practice (an industry generated standard) to enable fulfillment of its obligations. Other products the Company has developed are considered, and the archiving software for ultrasound images that the Company intends to develop will be considered, "medical devices" under FDA regulations. Before such products may be marketed in the U.S., they must receive FDA clearance of a premarket notification application ("510(k) clearance") or FDA clearance of a premarket approval application ("PMA"). In June 1996 the Company received 510(k) clearance to market several versions of uPACS-TM-. Obtaining such clearance can take substantial time and can require substantial expenditures. Many other countries regulate the manufacture, marketing and use of medical devices in ways similar to the U.S. There can be no assurance that the Company will be able to obtain required clearances for any products it develops on a timely or cost-effective basis, if at all. EMPLOYEES The Company currently employs a total work force of 207 persons, including 94 engineers and designers, plus additional contract labor. Of the total work force, 96 persons, including 53 engineers and designers, work primarily for the MTD. None of the Company's employees are covered by collective bargaining agreements. The Company has never experienced any labor disruptions or work stoppages and considers its employee relations to be good. PROPERTIES The Company's principal facility in the United States is in Trenton, New Jersey. The Company occupies 82,000 square feet in Trenton for its corporate headquarters and engineering, manufacturing and support activities, of which approximately 40,000 square feet (including 10,000 square feet of common space) is proposed to be sub-leased to the Purchaser, with the remaining 42,000 square feet to be occupied by the MTD. The lease for such space expires in October 2009. The Company leases approximately 3,000 square feet of space in Camberley, England, for use as administrative offices and software development facilities. The lease for the office space in the Camberley facility expires in March 2003. The Company also leases small office facilities in Copenhagen, Brussels and Tokyo. The Company's headquarters and manufacturing facility in Trenton, New Jersey was subject to a sale and leaseback transaction completed in October 1994. The Company's fifteen year lease on the facility includes a repurchase option first exercisable at $4.3 million during fiscal 1996, declining to $3.5 million during the last five years of the lease. Management believes that the Company's facilities are adequate for its operations and are maintained in good condition. LEGAL PROCEEDINGS No material legal proceedings are pending by or against the Company and, to the knowledge of Base Ten, none are contemplated against the Company by governmental authorities. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The Class A Stock is listed on Nasdaq under the trading symbol BASEA, and the Class B Stock is traded in the Nasdaq Over the Counter Market and quoted on its Supplemental List under the trading symbol BASEB. The following table sets forth the high and low sale prices of the Class A Stock and Class B Stock as reported by Nasdaq for the periods indicated: CLASS B COMMON STOCK CLASS A COMMON STOCK BID PRICE BID PRICE ------------------------ ---------------------- HIGH LOW HIGH LOW ---------- ------------ ---------- ---------- FISCAL 1996: First quarter..... $ 133/4 $ 101/8 $ 125/8 $ 101/2 Second quarter.... 111/8 87/8 111/4 91/2 Third quarter..... 131/2 915/16 143/4 113/8 Fourth quarter.... 131/4 10 14 131/2 FISCAL 1997: First quarter..... $ 121/2 $ 10 $ 141/4 $ 121/4 Second quarter.... 113/8 93/4 143/4 123/4 Third quarter..... 107/8 95/8 141/4 111/2 Fourth quarter (through October 27, 1997)....... 16 915/16 131/4 101/2 As of November 14, 1997, there were approximately 663 record holders of Class A Stock and 145 record holders of Class B Stock. The Company has not paid cash dividends on its Common Stock since 1985. The present policy of the Board of Directors is to retain any future earnings to provide for the Company's growth. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE PURCHASE AGREEMENT PROVIDING FOR THE SALE THE PROPOSED ISSUANCE (PROPOSAL 2) BACKGROUND In order to assure that what the Company believes will be adequate financial resources are available for continued marketing and development efforts by the MTD, the Board of Directors authorized, and the Company has consummated, the first installment of the sale of up to $19 million of convertible preferred stock ("Preferred Stock") and Class A Stock purchase warrants (the "Warrants"). A total of $9.375 million of Preferred Stock and Warrants were sold and issued as of December 5, 1997, to eight institutional investors, consisting of Stark International, Shepherd Investments International, Ltd., Societe Generale, JMG Capital Partners, L.P., Triton Capital Investment, L.P., RGC International Investors, LDC, Elara Ltd., and Keyway Investments. The Company is obligated to sell and issue, and the existing holders of the Preferred Stock are required to purchase, an additional $9.675 million of Preferred Stock and Warrants, if and when this proposal is approved by the shareholders. The $9.675 million of Preferred Stock and Warrants not yet sold are referred to as the "Issuance." TERMS OF THE ISSUANCE Holders of Preferred Stock have the following rights, privileges and preferences: TERM; DIVIDENDS AND ILLIQUIDITY PAYMENTS. The Preferred Stock has a term of three years and pays a cumulative dividend of 8.0% per annum during any quarter in which the closing bid price for the Class A Stock is less than $8.00 for any 10 consecutive trading days. An equivalent payment is payable to any holder of Preferred Stock which is subject during any quarter to a standstill period (as described below) following a Base Ten underwritten public offering or which is non-convertible because of the limitations described below. Such dividends and payments are payable only prior to conversion, and payable in cash or additional Preferred Stock at Base Ten's option; however, if Base Ten elects to pay the dividend in Preferred Stock, the amount of such payment will be 125% of the cash amount due. LIQUIDATION PREFERENCE. The Preferred Stock has a liquidation preference as to its principal amount and any accrued and unpaid dividends. CONVERSION RIGHTS. The Preferred Stock is convertible at any time or from time to time into Class A Stock, at a conversion price equal to the LESSER of (i) $16.25 per share, or (ii) the Weighted Average Price of the Class A Stock prior to the conversion date. Weighted Average Price is defined as the volume weighted average price of Class A Stock on Nasdaq (as reported by Bloomberg Financial Markets) over any two trading days in the 20 trading day period ending on the day prior to the date the holder gives notice of conversion (excluding the lowest closing bid price in that period). The holder has the right to select such two days. In any event, no more than 3,040,000 shares of Class A Stock shall be issued upon conversion of all of the Preferred Stock. Any Preferred Stock remaining outstanding because of this limitation may be redeemed at the holder's option for a subordinated 8% promissory note maturing when the Preferred would have matured. COMPANY REDEMPTION RIGHT. Base Ten has the right, at any time, to redeem all or any part of the outstanding Preferred Stock or subordinated notes at 130% of their original purchase price. MANDATORY REDEMPTION ON MATURITY. Any shares of Preferred Stock or subordinated notes still outstanding three years after issuance must be redeemed in either cash or at Base Ten's option, in Class A Stock. If Base Ten elects to make the redemption in Class A Stock, the amount of such payment will be 125% of the original purchase price. VOTING RIGHTS. The holders of the Preferred Stock have the same voting rights as the holders of Class A Stock, calculated as if all outstanding shares of Preferred Stock had been converted into shares of Class A Stock on the record date for determination of shareholders entitled to vote on the matter presented. WARRANTS. For each $1 million of Preferred Stock purchased, a purchaser will receive five-year warrants to purchase 40,000 shares of Class A Stock exercisable at $16.25 per share. RIGHT OF FIRST REFUSAL. So long as shares of the Preferred Stock remain outstanding, each holder has the right (with certain exceptions) to purchase, on five days notice, up to that portion of any future equity financing by Base Ten which would be sufficient to enable the holder to maintain its percentage interest in Base Ten equity on a fully diluted basis. REGISTRATION. Base Ten is required to file a registration statement ("Registration Statement") with the Securities and Exchange Commission ("SEC") registering for resale the Class A Stock underlying the Preferred Stock, including any Preferred Stock which may be issued as a dividend, and the Warrants, which must be effective no later than March 2, 1998. In the event the Registration Statement is not declared effective by the SEC by such date, Base Ten will be required to pay the holders of the Preferred an amount equal to 1 1/2% of the original purchase price for each month until the Registration Statement has been declared effective. The holders have agreed, if requested by a managing underwriter, to a 90-day standstill period following any underwritten Base Ten public offering, but not in excess of two such standstills in any 18-month period. In the event a standstill period is effective, the maturity date of the Preferred Stock would be extended by the duration of the standstill period. REASONS FOR THE PROPOSAL The Company is seeking shareholder approval of the Issuance pursuant to the designation criteria for continued inclusion of the Class A Stock on NASDAQ. Specifically, the NASDAQ rules require an issuer that has securities listed on NASDAQ to seek shareholder approval of any issuance of securities that will result in issuance of shares representing 20% or more of the issuer's outstanding voting common stock, at a price per share below the market price of the issuer's voting common stock. The terms of the Preferred Stock provide that it is convertible at a price equal to the Weighted Average Price. Because Weighted Average Price (as defined) may be below the market price of the Class A Stock on the closing date of the Issuance, under the NASDAQ rules the Issuance requires shareholder approval. RISK FACTORS While the Board of Directors recommends approval of the Issuance and is of the opinion that the proposal regarding the Issuance is fair to, and in the best interest of, the Company and its shareholders, the Company's shareholders should consider the following possible effects in evaluating the Issuance. EFFECT OF ACTUAL OR POTENTIAL FUTURE CONVERSIONS BELOW MARKET PRICE. If consummated, the Issuance will substantially increase the number of shares of Preferred Stock which are convertible at any time, or from time to time, into shares of Class A Stock at a conversion price per share which may be substantially below the current market price of the Class A Stock. In addition, because Weighted Average Price for purposes of conversion of the Preferred Stock is measured by reference to closing bid price on two trading days selected by the holder in the 20-day trading period preceding conversion, the actual conversion price may be substantially lower than the average market price of the Class A Stock over the 20-day trading period, or the average market price on the date of conversion. For example, if the average closing bid price of the Class A Stock over a 20-day trading period is $12.75 per share, reflecting fluctuating bid prices during the 20-day trading period ranging from $11.00 per share to $13.00 per share, with 17 of the daily closing bid prices equal to or greater than $12.75 per share, but three daily closing bid prices at $11.00 per share, the holders of the Preferred Stock would have the right to convert their shares into Class A Stock at an effective conversion price of $11.00 per share, or only 86% of the 20-day trading average. Moreover, the potential issuance of Class A Stock upon conversion of the Preferred Stock at conversion prices which may be significantly lower than current market prices may have a depressive effect on the market price of, and reduce trading activity in the Class A Stock. DILUTION. If consummated, and if all of the Preferred Stock were converted into the maximum number of shares of Class A Stock, the Issuance would increase the number of shares of outstanding Class A Stock by approximately 40% and significantly dilute the ownership interests and proportionate voting power of the existing holders of Class A Stock. USE OF PROCEEDS The proceeds of the Issuance may be utilized for working capital and other general corporate purposes. INTERESTS OF CERTAIN PERSONS IN THE ISSUANCE; CONFLICTS OF INTEREST The terms of a consulting agreement between the Company and its former Chief Executive Officer and current Chairman, Mr. Myles M. Kranzler, provide for certain fees, in consideration of certain consulting and non-competition covenants and commitments, to be due and payable to Mr. Kranzler upon consummation of certain financings such as the Issuance. See "The Proposed Sale of the Government Technology Division--Certain Arrangements Regarding Certain Directors and Management of Base Ten Following the Sale." Another director, Mr. Alex Adelson, will receive a financial advisory fee of approximately $190,000 plus warrants to purchase approximately 95,000 shares of Class A Stock, exercisable at $12.50 per share (the market price of the Class A Stock on the date of the first sale of the Preferred Stock), if the sale of all $19 million of Preferred Stock is consummated. REQUIRED VOTE Assuming a quorum is present, the affirmative vote of a majority of the votes cast by holders of Class A Stock, together with Class B Stock, at the Meeting, either in person or by proxy, is required for the approval of the Issuance. Abstentions will be counted as present in determining whether a quorum exists, but will have the same effect as a vote against the Issuance. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE ISSUANCE THE PROPOSED OPTION PLAN AMENDMENTS (PROPOSAL 3) GENERAL The Company's management considered employee morale and reaction to a possible sale of the GTD, and reached an initial determination during August and September 1997 that in order to retain valued employees of both the GTD and the MTD during the sale process and to encourage certain of them to agree to be employed by a buyer of the GTD, it would be in the best interests of the Company and its shareholders to extend the exercise period of certain employees' options for a two year period following any termination of employment, even if voluntary. In connection therewith, the Company has determined that amendments (the "Amendments") to the Base Ten Stock Option Plan (the "Base Ten Plan"), the 1990 Incentive Stock Option Plan (the "1990 Plan"), the 1992 Stock Option Plan (the "1992 Plan") and the 1995 Incentive Stock Option Plan (the "1995 Plan," and along with the Base Ten Plan, 1990 Plan and 1992 Plan, each sometimes hereinafter referred to as a "Plan" and, collectively, the "Incentive Stock Option Plans" or the "Plans") which would extend the period within which option holders whose employment terminated could exercise such options from 90 days to two years would be required, approval of which is being sought at the Meeting. Such amendments would confer certain benefits upon the option holders. No other changes in the terms and provisions of the Plans are contemplated or are being sought at the Meeting. The Base Ten Board is unanimous in its recommendation to the holders of Base Ten Common Stock that the Amendments be approved. The following description of the Plans and the proposed amendments are qualified in its entirety by reference to the terms of the Plans. DESCRIPTION OF THE PLANS Each of the Plans is administered by the Base Ten Board. Under each of the Plans, the Base Ten Board has the authority to determine the employees to whom options will be granted, the number of shares covered by each option, the price per share specified in each option, the time or times at which options will be granted and the terms and provisions of the instruments by which options will be evidenced. The aggregate number of shares of Class A Common Stock originally available for issuance under each of the Plans, subject to certain adjustments as set forth in each of the Plans, is 80,000 under the Base Ten Plan, 484,000 under the 1990 Plan, 700,000 under the 1992 Plan and 750,000 under the 1995 Plan. Each of the Plans permits the granting of ISOs (or in the case of the Base Ten Plan, non-qualified stock options) to employees at an exercise price not less than the fair market value of the Class A Stock or in the case of the 1990 Plan, the Class A Stock or Class B Stock, on the date of grant (or 110% of the fair market value in the case of ISOs granted to employees holding more than 10% of the voting stock of the Company). Under the Plans, the aggregate fair market value of the shares for which a recipient's ISO becomes exercisable for the first time during any calendar year may not exceed $100,000. The term of each ISO cannot exceed ten years from the date of grant (or five years for options granted to employees holding 10% or more of the voting stock of the Company). Options become exercisable in such installments and at such times as the Base Ten Board may determine. Options may not be assigned or transferred except by will or by operation of the laws of descent and distribution. Unless terminated sooner, the 1990 Plan will terminate on January 12, 2002, the 1992 Plan will terminate on April 27, 2002, the Base Ten Plan will terminate on February 27, 2005 and 1995 Plan will terminate on September 6, 2005. All employees of the Company, including officers and directors who are also employees, are eligible to receive options under the Plans. The Company currently has approximately 200 employees. The maximum number of shares of Class A Stock subject to options which may be granted to an employee who is also a director is 50,000 shares or 250,000 in the aggregate for all such management directors under the 1990 Plan, and 100,000 and 350,000 under each of the 1992 Plan and 1995 Plan; there is no maximum number of shares subject to options which may be granted to directors, individually or collectively, under the Base Ten Plan. ADMINISTRATION OF THE PLANS Option holders seeking to exercise their option are to deliver to the Company a written exercise notice along with payment of the exercise price. Payment of the exercise price shall be in cash or shares of the Company's Class A or Class B Stock valued at fair market value at the time of exercise. The Base Ten Board may permit the voluntary surrender of all or a portion of any option granted under a Plan to be conditioned upon the granting to the optionee of a new option for the same or different number of shares of Common Stock as the option surrendered, or may require such voluntary surrender as a condition to a grant of a new option to such optionee. Such new option is exercisable at the price, during the period, and in accordance with any other terms or conditions specified by the Base Ten Board at the time the new option is granted, all determined in accordance with the provisions of each of the Plans without regard to the price, period of exercise, or any other terms or conditions of the option surrendered. AMENDMENT OF THE PLANS The Base Ten Board may make such changes in and additions to any of the Plans as it may deem proper and in the best interest of the Company; provided, however, that no such change or addition shall, without the consent of the optionee, impair any option theretofore granted under any of the Plans and provided further that, without the approval of the shareholders of the Company, (1) the total number of shares which may be purchased under each of the Plans shall not be increased except as provided in the Plans; (2) the option price shall not be reduced below the limits set forth in each of the Plans; (3) the option period with respect to any option shall not be extended beyond the maximum periods permitted by the Plans; (4) the class of employees eligible to receive the options shall not be varied; and (5) no such change or addition shall be made as shall cause any option issued or issuable under each of the Plans to fail to qualify as an incentive stock option. Pursuant to each of the Plans, the Company has the right at any time to reacquire and cancel, without the consent of the optionee, any outstanding option in consideration of the payment to the optionee of an amount equal to the difference between the option price and the fair market value (as of the date of reacquisition) of the shares subject to the option. The shares subject to a reacquired and canceled option for which such payment has been made shall not again be available for the grant of ISOs under any of the Plans. PRINCIPAL FEDERAL INCOME TAX CONSEQUENCES The following is a general summary of the federal income tax consequences to the Company and the optionee of the issuance and exercise of ISOs. Neither the grant nor the exercise of an ISO will have immediate tax consequence to an optionee or the Company. If an optionee exercises an ISO and does not dispose of the acquired stock within two years after the date of the grant of the option or within one year after the purchase of the stock by the optionee, the Company will not be entitled to a tax deduction, the optionee will realize no ordinary income and any gain or loss that is realized on a subsequent sale or taxable exchange of the stock will be treated as a long-term capital gain or loss. The exercise of an ISO gives rise to alternative minimum taxable income that may subject the optionee to the alternative minimum tax. If an optionee exercises an ISO and disposes of the acquired stock within two years after the date of the grant of the option or within one year after the date of the purchase of the stock by the optionee, the optionee will recognize ordinary income equal to the lesser of (i) the excess of the fair market value of the shares on the date of exercise over the option price or (ii) the excess of the amount realized on the disposition over the option price. The Company will be entitled to a corresponding income tax deduction equal to the amount of ordinary income so recognized by the optionee. Further, if the amount realized on the disposition exceeds the fair market value of the stock on the date of exercise, the excess will be treated as a long or short term capital gain, depending on the holding period of the stock. BENEFITS TO CERTAIN PERSONS OF THE PROPOSED AMENDMENTS The following table illustrates certain of the benefits of the proposed amendments to non-officer employees of the Company. The proposed amendments will not be applied by the Base Ten Board to options previously granted to officers of the Company. BENEFITS OF THE AMENDED PLANS
BASE TEN PLAN 1990 PLAN 1992 PLAN 1995 PLAN ------------------------ ---------------------------- ------------------------ ---------- NUMBER NUMBER NUMBER DOLLAR OF DOLLAR OF DOLLAR OF DOLLAR NAME VALUE(1) UNITS(2) VALUE(1) UNITS(2) VALUE(1) UNITS(2) VALUE(1) - ------------------------------- ----------- ----------- ------------- ------------- ----------- ----------- ---------- Executive Group................ N/A N/A N/A N/A N/A N/A N/A Non-Executive Director Group... N/A N/A N/A N/A N/A N/A N/A Non-Executive Officer Employee Group........................ $ 25,500 101,600 N/A N/A $ 25,750 102,600 $ 215,275
NUMBER OF NAME UNITS(2) - ------------------------------- ----------- Executive Group................ N/A Non-Executive Director Group... N/A Non-Executive Officer Employee Group........................ 857,600 - ------------------------ (1) Dollar value is shown on a per-share basis, calculated using the Black-Scholes option pricing model adopted for use in valuing stock options. (2) The number of outstanding options granted under the Plans which would be affected by the Amendments. ACCOUNTING TREATMENT Approval and adoption of the proposed option plan amendments will result in a new measurement date for the options with respect to which the exercise period is being extended, and the Company will thereupon recognize a charge to earnings (but with no effect on shareholders' equity) of not greater than $900,000 in the fiscal quarter in which the amendments are approved and become effective (currently anticipated to be the fiscal quarter ended January 31, 1998). REQUIRED VOTE Approval of Proposal 3 will require the affirmative vote of a majority of the votes cast on Proposal 3 by the holders of Class A Common Stock and Class B Common Stock represented in person or by proxy voting as a single class, with each share of Class A Common Stock being entitled to one-tenth vote and each share of Class B Common Stock being entitled to one vote. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE PROPOSED OPTION PLAN AMENDMENTS ATTENDANCE OF AUDITORS AT THE MEETING. Representatives of Deloitte & Touche LLP, the Company's auditors, are expected to be present at the Meeting and will have the opportunity to make a statement if they choose to do so and will be available to respond to appropriate questions of shareholders. SHAREHOLDER PROPOSALS Pursuant to Rule 14a-8 of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), shareholders of Base Ten may present proper proposals for inclusion in the proxy statement of Base Ten related to, and for consideration at, the next annual meeting of its shareholders by submitting their proposals to Base Ten in a timely manner. Any proposal of a shareholder which meets the requirements of Rule 14a-8 of the Exchange Act and intended to be presented at the Company's 1998 Annual Meeting of the Shareholders, must have been received by the Company for inclusion in the proxy statement and form of proxy for that meeting no later than October 10, 1997. No such proposals have been presented to the Company. APPRAISAL RIGHTS Under applicable New Jersey law, the Company's shareholders are entitled to statutory appraisal rights with respect to, among other matters, a sale of "all or substantially all of the assets" of the Company, unless the Class A Stock is listed on a "national securities exchange." The Company's management is of the view that the sale of the GTD does not constitute a sale of "all or substantially all of the assets" of the Company under applicable New Jersey law. In addition, the inclusion of the Class A Stock on NASDAQ may constitute listing on a "national securities exchange". Management is nonetheless submitting the Sale for shareholder approval because of the nature of the transaction and to eliminate any issues as to proper corporate authorization. Therefore, the Company's management is of the view that the Company's shareholders are not entitled to statutory appraisal rights in connection with the Proposals covered by this Proxy Statement, including the Sale, and presently intends to oppose any effort by a shareholder to seek appraisal of their shares with respect to the Sale. However, if it were determined that the Company's shareholders have appraisal rights under the New Jersey Business Corporation Act (the "Business Corporation Act"), holders of Common Stock would have to comply with Chapter 11 of the Business Corporation Act as described below. Under Chapter 11, in order to claim dissenters rights a holder of Common Stock must file with Base Ten, to the attention of Edward J. Klinsport, Vice President and Secretary, either by mail or by delivery to One Electronics Drive, Trenton, New Jersey 08669, before the taking of the vote on the Sale at the Meeting, a written notice of dissent from the Sale proposal, stating such holder's intention to demand payment for such holder's shares if the Sale is effected. A negative vote or proxy will not be deemed to constitute a written dissent which complies with the Business Corporation Act; however, the failure to vote against approval of the Sale will not constitute a waiver of a shareholder's appraisal rights. If the Sale is approved, and if dissenters' rights were determined to be available, each holder of Common Stock who filed written notice of dissent, except any who voted for the Sale, may require Base Ten to purchase his shares of Common Stock at their fair value on the day prior to the date of the shareholder's meeting approving the Sale, by making written demand on Base Ten for the payment of such fair value within twenty days after the mailing of written notice to such shareholder of the effective date of the Sale (which notice would be required to be sent to each such shareholder by Base Ten by certified mail within ten days after the Effective Date). A dissenting shareholder may not withdraw a demand for payment of the fair value of such holder's share without the written consent of Base Ten. No later than twenty days after a holder of Common Stock demands payment for such holder's shares, such holder must submit the certificates representing such holder's shares to Base Ten for notation thereon that such demand has been made, whereupon such certificates will be returned to such holder. If Base Ten and any such holder of Common Stock are unable to agree as to the fair value of such holder's shares, Chapter 11 of the Business Corporation Act provides for a judicial determination of such fair value to be made. In all cases, fair value shall exclude any appreciation or depreciation resulting from the Sale. Any holder of Common Stock who files a written notice of dissent and makes a written demand for payment will cease to have any of the rights of a holder of Common Stock except the right to be paid the fair value of such holder's shares and the other rights of a dissenting shareholder under Chapter 11 of the Business Corporation Act. The foregoing summary does not purport to be a complete statement of the provisions of Chapter 11 of the Business Corporation Act and is qualified in its entirety by reference to the text of the statute, a copy of certain provisions of which is annexed to this Proxy Statement as Exhibit B. THE COMPANY'S MANAGEMENT IS OF THE VIEW THAT APPRAISAL RIGHTS UNDER CHAPTER 11 OF THE BUSINESS CORPORATION ACT ARE NOT AVAILABLE TO SHAREHOLDERS WITH RESPECT TO THE SALE. By Order of the Board of Directors [SIGNATURE] Edward J. Klinsport CHIEF FINANCIAL OFFICER, EXECUTIVE VICE PRESIDENT AND SECRETARY Dated: December 15, 1997 BASE TEN SYSTEMS, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report............................................................................... F-2 Consolidated Balance Sheets--October 31, 1996 (as Restated) and October 31, 1995 (as Restated)............. F-3 Consolidated Statements of Operations--Years ended October 31, 1996, 1995 and 1994 (as Restated)........... F-4 Consolidated Statements of Shareholders' Equity--Years ended October 31, 1996, 1995 and 1994 (as Restated)................................................................................................ F-5 Consolidated Statements of Cash Flows--Years ended October 31, 1996, 1995 and 1994 (as Restated)........... F-6 Notes to Consolidated Financial Statements................................................................. F-7 Consolidated Balance Sheets--July 31, 1997 (unaudited) and October 31, 1996 (as Restated) (audited)........ F-19 Consolidated Statements of Operations--Nine months and Three months ended July 31, 1997 and 1996 (unaudited).............................................................................................. F-20 Consolidated Statements of Shareholders' Equity--Nine months ended July 31, 1997 (unaudited)............... F-21 Consolidated Statements of Cash Flows--Nine months ended July 31, 1997 and 1996 (unaudited)................ F-22 Notes to Consolidated Financial Statements (unaudited)..................................................... F-23
INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Base Ten Systems, Inc. Trenton, New Jersey 08619 We have audited the consolidated balance sheets of Base Ten Systems, Inc. and subsidiaries as of October 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended October 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Base Ten Systems, Inc. and subsidiaries as of October 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1996 in conformity with generally accepted accounting principles. AS DISCUSSED IN NOTE M, THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS HAVE BEEN RESTATED. Parsippany, New Jersey December 23, 1996 (May 16, 1997 as to Note M) BASE TEN SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
OCTOBER 31, OCTOBER 31, 1996 1995 ------------- ------------- (AS RESTATED, SEE NOTE M) CURRENT ASSETS: Cash................................................................................ $ 7,465,000 $ 7,221,000 Accounts receivable (including unbilled receivables of $4,162,000 in 1996 and $3,271,000 in 1995)............................................................... 7,515,000 6,034,000 Inventories......................................................................... 2,935,000 3,151,000 Current portion of employee loan receivable......................................... 128,000 108,000 Other current assets................................................................ 386,000 536,000 ------------- ------------- TOTAL CURRENT ASSETS............................................................ 18,429,000 17,050,000 PROPERTY, PLANT AND EQUIPMENT......................................................... 5,071,000 4,480,000 EMPLOYEE LOAN RECEIVABLE.............................................................. 148,000 298,000 OTHER ASSETS.......................................................................... 6,700,000 6,177,000 ------------- ------------- $ 30,348,000 $ 28,005,000 ------------- ------------- ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.................................................................... $ 1,472,000 $ 1,246,000 Accrued expenses.................................................................... 2,994,000 1,454,000 Income taxes payable................................................................ -- 1,038,000 Current portion of capital lease obligation......................................... 47,000 42,000 ------------- ------------- TOTAL CURRENT LIABILITIES....................................................... 4,513,000 3,780,000 ------------- ------------- LONG-TERM LIABILITIES: Deferred income taxes............................................................... -- 83,000 Deferred compensation............................................................... 19,000 90,000 Other long-term liabilities......................................................... 247,000 266,000 Capital lease obligation............................................................ 3,478,000 3,525,000 Long-term debt...................................................................... 10,000,000 -- ------------- ------------- TOTAL LONG-TERM LIABILITIES..................................................... 13,744,000 3,964,000 ------------- ------------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred Stock, $1.00 par value, authorized and unissued 1,000,000 shares.................................................................. -- -- Class A Common Stock, $1.00 par value, 22,000,000 shares authorized; issued and outstanding 7,358,964 shares in 1996 and 7,216,195 shares in 1995........................................................................... 7,359,000 7,216,000 Class B Common Stock, $1.00 par value, 2,000,000 shares authorized; issued and outstanding 445,387 shares in 1996 and 458,474 shares in 1995 (convertible into Class A Common Stock on a one for one basis)...................................... 445,000 458,000 Additional paid-in capital.......................................................... 25,086,000 24,410,000 Deficit............................................................................. (20,640,000) (11,681,000) ------------- ------------- 12,250,000 20,403,000 Equity adjustment from foreign currency translation................................... (159,000) (142,000) ------------- ------------- 12,091,000 20,261,000 ------------- ------------- $ 30,348,000 $ 28,005,000 ------------- ------------- ------------- -------------
See Notes to Consolidated Financial Statements BASE TEN SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, ------------------------------------------- 1996 1995 1994 ------------- ------------- ------------- (AS RESTATED, SEE NOTE M) REVENUE Sales............................................................. $ 14,591,000 $ 17,841,000 $ 18,698,000 Other............................................................. 300,000 466,000 584,000 ------------- ------------- ------------- 14,891,000 18,307,000 19,282,000 ------------- ------------- ------------- COSTS AND EXPENSE: Cost of sales..................................................... 10,973,000 11,813,000 12,996,000 Amortization of software development costs........................ 1,278,000 630,000 -- Research and development.......................................... 998,000 863,000 887,000 Selling, general and administrative............................... 8,509,000 6,298,000 5,131,000 Write-off of software development costs........................... 2,429,000 -- -- Interest.......................................................... 710,000 554,000 209,000 ------------- ------------- ------------- 24,897,000 20,158,000 19,223,000 ------------- ------------- ------------- EARNINGS/(LOSS) BEFORE INCOME TAXES................................. (10,006,000) (1,851,000) 59,000 INCOME TAXES/(BENEFIT).............................................. (1,047,000) (474,000) 24,000 ------------- ------------- ------------- NET EARNINGS (LOSS)................................................. $ (8,959,000) $ (1,377,000) $ 35,000 ------------- ------------- ------------- ------------- ------------- ------------- NET EARNINGS (LOSS) PER COMMON SHARE................................ $ (1.16) $ (.20) $ .03 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.......................... 7,743,000 6,926,000 7,569,000
See Notes to Consolidated Financial Statements BASE TEN SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
EQUITY ADJUSTMENT CLASS A CLASS B ADDITIONAL FROM FOREIGN -------------------- -------------------- PAID-IN CURRENCY TREASURY SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TRANSLATION STOCK --------- --------- --------- --------- ---------- ----------- ------------ ----------- BALANCE: October 31, 1993............... 4,646,670 $4,647,000 558,111 $ 558,000 $13,253,000 $(10,339,000) $ (162,000) -- Conversions of Class B Common to Class A Common............ 81,635 82,000 (81,635) (82,000) -- -- -- -- Exercise of Options............ 87,561 88,000 -- -- 185,000 -- -- (14,000) Exercise of Rights............. 305 -- -- -- -- -- -- -- Exercise of Warrants........... 204,022 204,000 -- -- 936,000 -- -- -- Foreign currency translation... -- -- -- -- -- -- 40,000 -- Retirement of treasury stock... (13,631) (14,000) -- -- -- -- -- 14,000 Net Earnings/(Loss)............ -- -- -- -- -- 35,000 -- -- --------- --------- --------- --------- ---------- ----------- ------------ ----------- --------- --------- --------- --------- ---------- ----------- ------------ ----------- BALANCE: October 31, 1994............... 5,006,562 5,007,000 476,476 476,000 14,374,000 (10,304,000) (122,000) -- Conversions of Class B Common to Class A Common............ 20,896 21,000 (20,896) (21,000) -- -- -- -- Exercise of Options............ 123,131 123,000 5,000 5,000 400,000 -- -- (14,000) Exercise of Rights............. 828,542 828,000 -- -- 3,444,000 -- -- -- Exercise of Warrants........... 1,248,701 1,249,000 -- -- 5,690,000 -- -- -- Capital Contribution (as restated, see Note M)........ -- -- -- -- 502,000 -- -- -- Foreign currency translation... -- -- -- -- -- -- (20,000) -- Retirement of treasury stock... (11,637) (12,000) (2,106) (2,000) -- -- -- 14,000 Net Earnings/(Loss) (as restated, see Note M)........ -- -- -- -- -- (1,377,000) -- -- --------- --------- --------- --------- ---------- ----------- ------------ ----------- --------- --------- --------- --------- ---------- ----------- ------------ ----------- BALANCE: October 31, 1995 (as restated, see Note M).................. 7,216,195 $7,216,000 458,474 $ 458,000 $24,410,000 $(11,681,000) $ (142,000) -- Conversions of Class B Common to Class A Common............ 5,418 5,000 (5,418) (5,000) -- -- -- -- Exercise of Options............ 137,351 138,000 676,000 -- -- (8,000) Foreign currency translation... -- -- -- -- -- -- (17,000) -- Retirement of treasury stock... -- -- (7,669) (8,000) -- -- -- 8,000 Net Earnings/(Loss)............ -- -- -- -- -- (8,959,000) -- -- --------- --------- --------- --------- ---------- ----------- ------------ ----------- --------- --------- --------- --------- ---------- ----------- ------------ ----------- BALANCE: October 31, 1996 (as restated, see Note M).................. 7,358,964 $7,359,000 445,387 $ 445,000 $25,086,000 $(20,640,000) $ (159,000) -- --------- --------- --------- --------- ---------- ----------- ------------ ----------- --------- --------- --------- --------- ---------- ----------- ------------ -----------
See Notes to Consolidated Financial Statements. BASE TEN SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED OCTOBER 31, ------------------------------------------- 1996 1995 1994 ------------- ------------- ------------- (AS RESTATED, SEE NOTE M) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings/(loss)............................................... $ (8,959,000) $ (1,377,000) $ 35,000 ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH (USED IN)/PROVIDED FROM OPERATING ACTIVITIES: Depreciation and amortization....................................... 1,743,000 1,106,000 586,000 Write off of Software Development Costs............................. 2,429,000 -- -- Contribution to Capital............................................. -- 502,000 -- Deferred gain on sale of building................................... (19,000) (17,000) (282,000) Deferred income taxes............................................... (83,000) (149,000) (290,000) Accounts receivable................................................. (1,481,000) (966,000) 228,000 Inventories......................................................... 216,000 (740,000) (269,000) Other current assets................................................ 150,000 (237,000) 303,000 Accounts payable and accrued expenses............................... 1,766,000 162,000 (398,000) Deferred compensation............................................... (71,000) (58,000) (23,000) Other assets........................................................ (4,126,000) (3,846,000) (2,171,000) Income taxes payable................................................ (1,038,000) (325,000) 314,000 ------------- ------------- ------------- NET CASH (USED IN) OPERATIONS....................................... (9,473,000) (5,945,000) (1,967,000) ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment.......................... (1,058,000) (350,000) (306,000) Proceeds from sale of land and building............................. -- -- 3,600,000 ------------- ------------- ------------- NET CASH (USED IN)/PROVIDED FROM INVESTING ACTIVITIES............... (1,058,000) (350,000) 3,294,000 ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of amounts borrowed....................................... (42,000) (34,000) (4,711,000) Proceeds from the issuance of common stock.......................... 10,000,000 -- -- Issuance of Long Term Debt.......................................... 806,000 11,725,000 1,399,000 ------------- ------------- ------------- NET CASH PROVIDED FROM/(USED IN) FINANCING ACTIVITIES............... 10,764,000 11,691,000 (3,312,000) ------------- ------------- ------------- Effect of Exchange Rate Changes on Cash............................. 11,000 (43,000) 50,000 ------------- ------------- ------------- NET INCREASE/(DECREASE) IN CASH..................................... 244,000 5,353,000 (1,935,000) CASH, beginning of year............................................. 7,221,000 1,868,000 3,803,000 ------------- ------------- ------------- CASH, end of year................................................... $ 7,465,000 $ 7,221,000 $ 1,868,000 ------------- ------------- ------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest.............................. $ 485,000 $ 527,000 $ 173,000 ------------- ------------- ------------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Retirement of Treasury Stock........................................ $ 8,000 $ 14,000 $ 14,000 ------------- ------------- -------------
See Notes to Consolidated Financial Statements BASE TEN SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994 A. DESCRIPTION OF BUSINESS Base Ten Systems, Inc. and subsidiaries ("Base Ten" or the "Company") designs and manufactures proprietary weapons control systems employing microprocessors and advanced software for use in military aircraft and builds custom designed electronic assemblies as a subcontractor to prime government contractors. In addition, the Company develops batch processing control, medical screening and image archiving software and designs and builds proprietary electronic systems for use in secure communications. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. BASIS OF PRESENTATION--The Company's consolidated financial statements have been prepared on an historical cost basis. 2. PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the accounts of Base Ten. All significant intercompany accounts, transactions and profits have been eliminated. 3. REVENUE RECOGNITION--For Medical Software Products, the Company evaluates each product and order on an individual basis to determine the proper revenue recognition method. Contracts to deliver software which require significant customization or modification for an extended period of time are accounted for under the percentage of completion method. For the products or orders which are more standardized in nature, revenue is recognized on delivery. For products in the Government Technology Division earnings on long-term contracts are recognized on the percentage-of-completion or unit-of-delivery basis. CHANGES IN ESTIMATES ARE ACCOUNTED FOR USING THE CUMULATIVE CATCH UP METHOD AND ARE IMMATERIAL IN EACH PERIOD PRESENTED. On contracts where the percentage-of-completion method is used, costs and estimated earnings in excess of progress billings are presented as unbilled receivables. Unbilled costs of unit-of-delivery contracts are included in inventory. Payments received in excess of costs incurred on long-term contracts are recorded as customers' advance payments, which are included as a reduction of inventory on the balance sheet. 4. INVENTORIES--Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventoried costs on contracts include direct material, labor and applicable overhead. In accordance with industry practice, inventoried costs include amounts relating to contracts with a long production cycle, some of which are not expected to be realized within one year. 5. PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are carried at cost and depreciated over estimated useful lives, principally on the straight-line method. The estimated useful lives used for the determination of depreciation and amortization are: Leased asset--building........................................ 15 years 3 to 10 Machinery and equipment....................................... years 3 to 20 Furniture and fixtures........................................ years 6. OTHER ASSETS--Included in other non-current assets are software development costs capitalized in accordance with Statement of Financial Accounting Standard No. 86, "Accounting for Costs for Computer Software to be Sold, Leased or Otherwise Marketed" issued by the Financial Accounting Standards Board. The Company is required to capitalize certain software development and production costs once technological feasibility has been achieved. The cost of purchased software is capitalized when related to a product which has achieved technological feasibility or that has an alternative future use. For the year ended October 31, 1996, the Company capitalized $3.8 million of software development costs. Software development costs incurred prior to achieving technological feasibility are charged to research and development expense as incurred. The Company performs quarterly reviews of the recoverability of its capitalized software costs and other long lived assets based on anticipated revenues and cash flows from sales of these products. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows at the rate the Company utilizes to evaluate potential investments. The Company estimates fair value based on the best information available making whatever estimates, judgments and projections are considered necessary. Commencing upon initial product release, these costs are amortized based on the straight-line method over the estimated life of four years. In the second quarter of fiscal 1996 the Company conducted its regular quarterly review of the recoverability of its capitalized software costs and determined that neither PRENVAL nor uPACS would achieve sufficient revenues in future periods to justify retention of the related capitalized costs. Accordingly, the Company wrote off the $2.4 million balance of such capitalized costs. With respect to PRENVAL, it became apparent to the Company in late February 1996, after a discussion with the licensee, that market acceptance of the product was less than anticipated. Thereafter, in May 1996, the Company determined that the licensee had no current plans to market the product in the U.S. as was originally anticipated by the Company and that, as a result, sales would not exceed the amount necessary to generate royalties in excess of the minimum provided under the license. Effective as of the end of the second quarter of fiscal 1996, management resolved to suspend further development of PRENVAL. However, the Company will provide marketing support for the remainder of the license term. With respect to uPACS, the Company had implemented sales efforts in late 1995 and displayed the product at certain trade shows in Europe. In December 1995, sales were anticipated for early 1996. However, by early April 1996 it became clear that the anticipated sales would not materialize. The Company concluded that the product, as it then existed, would not generate sufficient sales to recover the capitalized costs, and that only a new product with networking, communications and off-line measurement capabilities would be capable of producing acceptable sales volume. 7. CASH AND CASH EQUIVALENTS--The Company considers all investments with a maturity of three months or less at date of acquisition to be cash equivalents. 8. RECENTLY ISSUED ACCOUNTING STANDARD--In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," which requires adoption of the disclosure provisions no later than fiscal years beginning after December 15, 1995 and adoption of the recognition and measurement provisions for nonemployee transactions no later than after December 15, 1995. The new standard defines a fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Pursuant to the new standard, companies are encouraged, but are not required, to adopt the fair value method of accounting for employee stock-based transactions. Companies are also permitted to continue to account for such transactions under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," but would be required to disclose in a note to the financial statements pro forma net income and, if presented, earnings per share as if the Company had applied the new method of accounting for all grants after November 1, 1995. The accounting requirements of the new method are effective for all employee awards granted after the beginning of the fiscal year of adoption. The Company has not yet determined if it will elect to change to the fair value method, nor has it determined the effect the new standard will have on net income and earnings per share should it elect to make such a change. Adoption of the new standard will have no effect on the Company's cash flows. 9. NET EARNINGS/(LOSS) PER SHARE--Earnings per share for fiscal years ended October 31, 1996, 1995 and 1994 were calculated using the number of weighted average common shares outstanding. Stock options, warrants and rights would have an anti-dilutive effect on earnings per share for the years ended October 31, 1996 and 1995 and therefore were not included in the calculation of weighted average shares and were not material in 1994. 10. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. 11. FAIR VALUE OF FINANCIAL INSTRUMENTS--The fair market value of certain financial instruments, including cash, accounts receivable, accounts payable, and other accrued liabilities, approximate the amount recorded in the balance sheet because of the relatively current maturities of these financial instruments. The fair market value of long term debt at October 31, 1996 and 1995 approximates the amounts recorded in the balance sheet based on information available to the Company with respect to interest rates and terms for similar financial instruments. 12. CHANGE IN PRESENTATION--Certain balance sheet items for fiscal 1995 have been reclassified to conform to the 1996 presentation. 13. FOREIGN CURRENCY TRANSLATION--The accounts of the consolidated foreign subsidiaries are translated into United States dollars in accordance with Financial Accounting Standards Board (FASB) Statement No. 52. Transaction gains and losses are immaterial. C. INVENTORIES OCTOBER 31, -------------------------- 1996 1995 ------------ ------------ Raw materials................................ $ 1,232,000 $ 1,557,000 Work in progress............................. 1,383,000 1,515,000 Finished goods............................... 369,000 95,000 ------------ ------------ 2,984,000 3,167,000 Less advance payments........................ 49,000 16,000 ------------ ------------ $ 2,935,000 $ 3,151,000 ------------ ------------ D. PROPERTY, PLANT AND EQUIPMENT OCTOBER 31, ---------------------------- 1996 1995 ------------- ------------- Leasehold improvement..................... $ 85,000 $ 21,000 Machinery and equipment................... 9,668,000 8,853,000 Furniture and fixtures.................... 705,000 617,000 Leased asset--land and building........... 3,600,000 3,600,000 ------------- ------------- 14,058,000 13,091,000 Less accumulated depreciation............. 8,987,000 8,611,000 ------------- ------------- $ 5,071,000 $ 4,480,000 ------------- ------------- Maintenance and repairs charged to costs and expenses amounted to $258,000, $240,000 and $239,000 in fiscal 1996, 1995 and 1994, respectively. E. OTHER ASSETS OCTOBER 31, -------------------------- 1996 1995 ------------ ------------ Patents (net of amortization)............ $ 362,000 $ 297,000 Capitalized costs........................ 4,255,000 3,773,000 Unamortized bond issue costs............. 579,000 -- Deposit-long term capital lease.......... 550,000 550,000 Long-term receivable..................... 770,000 1,150,000 Other.................................... 184,000 407,000 ------------ ------------ $ 6,700,000 $ 6,177,000 ------------ ------------ F. INCOME TAXES INCOME TAXES--Effective November 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), which requires a change from the deferred method's income statement approach of accounting for income taxes to an asset and liability approach of accounting for income taxes. Under the asset and liability approach, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. This change had no effect on the Company's statement of operations. The provision (benefit) for income taxes includes the following:
YEAR ENDED OCTOBER 31, -------------------------------------- 1996 1995 1994 ------------- ----------- ---------- Current: Federal............................................. $ (882,000) $ (325,000) $ 259,000 State............................................... (165,000) -- 55,000 Foreign............................................. -- -- -- ------------- ----------- ---------- Total Current................................... (1,047,000) (325,000) 314,000 ------------- ----------- ---------- ------------- ----------- ---------- Deferred: Federal............................................. -- (124,000) (239,000) State............................................... -- (25,000) (51,000) Foreign............................................. -- -- -- ------------- ----------- ---------- Total Deferred.................................. (149,000) (290,000) ------------- ----------- ---------- ------------- ----------- ---------- $ (1,047,000) $ (474,000) $ 24,000 ------------- ----------- ----------
A reconciliation of the Company's effective rate to the U.S. statutory rate is as follows:
PERCENTAGE OF PRE-TAX EARNINGS YEAR ENDED OCTOBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Federal tax (benefit)/provisions at applicable statutory rates...................... (34.0)% (34.0)% 34.0% Increases (decreases) in income taxes resulting from: State tax benefit, net of Federal tax effect...................................... (6.0) (4.0) 7.0 Net changes in current and deferred valuation allowances.......................... 31.5 6.9 -- Other, net........................................................................ (2.9) 5.5 -- --------- --------- --- (11.4)% (25.6)% 41.0% --------- --------- --- --------- --------- ---
OCTOBER 31, OCTOBER 31, 1996 1995 ------------- ------------- CURRENT Vacation...................................................... $ 212,000 $ 46,000 Deferred compensation......................................... 2,000 34,000 Other......................................................... -- 3,000 ------------- ------------- Total current assets............................................ 214,000 83,000 ------------- ------------- ------------- ------------- NONCURRENT Deferred gain on sale leaseback............................... $ 99,000 $ 101,000 Depreciation.................................................. (382,000) (315,000) Net operating loss carryforwards.............................. 3,666,000 681,000 Research and development and investment tax credits carryforwards............................................... 578,000 528,000 ------------- ------------- Total noncurrent assets....................................... $ 3,961,000 $ 995,000 Valuation allowance........................................... (4,175,000) (1,078,000) ------------- ------------- Net deferred tax assets....................................... -- -- ------------- ------------- ------------- -------------
The research and development and investment tax credits and the net operating loss carryforward are available to offset future taxable earnings of the Company. SFAS No. 109 requires that a valuation allowance be created and offset against the deferred tax assets if, based on existing facts and circumstances, it is more likely than not that some portion or all of the deferred asset will not be realized. The valuation allowance will be adjusted when the credits are realized or when, in the opinion of management, sufficient additional positive evidence exists regarding the likelihood of their realization. The reductions, if any, will be reflected as a component of income tax expense. The total current amounts presented above are included in other current assets on the balance sheet. The components of earnings/(loss) before income taxes were as follows:
YEAR ENDED OCTOBER 31, ---------------------------------------- 1996 1995 1994 -------------- ------------- --------- Domestic................................................................ $ (9,040,000) $ (1,845,000) $ 79,000 Foreign................................................................. (966,000) (6,000) (20,000) -------------- ------------- --------- $ (10,006,000) $ (1,851,000) $ 59,000 -------------- ------------- ---------
G. GEOGRAPHIC AND SEGMENT INFORMATION The following tabulation details the Company's operations in different geographic areas for the years ended October 31, 1994, 1995 and 1996.
UNITED STATES EUROPE ELIMINATIONS CONSOLIDATED ------------- ------------ ------------- ------------- YEAR ENDED OCTOBER 31, 1994: Revenues from unaffiliated sources.................... $ 19,268,000 $ 14,000 $ -- $ 19,282,000 ------------- ------------ ------------- ------------- Operating profit/loss................................. $ 288,000 $ (20,000) $ -- $ 268,000 ------------- ------------ ------------- ------------- Identifiable assets at October 31,1994................ $ 17,664,000 $ 398,000 $ (453,000) $ 17,609,000 ------------- ------------ ------------- ------------- ------------- ------------ ------------- ------------- YEAR ENDED OCTOBER 31, 1995: Revenues from unaffiliated sources.................... $ 17,925,000 $ 382,000 $ -- $ 18,307,000 ------------- ------------ ------------- ------------- Operating Loss........................................ $ (1,291,000) $ (6,000) $ -- $ (1,297,000) ------------- ------------ ------------- ------------- Identifiable assets at October 31, 1995............... $ 28,063,000 $ 960,000 $ (1,018,000) $ 28,005,000 ------------- ------------ ------------- ------------- ------------- ------------ ------------- ------------- YEAR ENDED OCTOBER 31, 1996: Revenues from unaffiliated sources.................... $ 14,840,000 $ 51,000 $ -- $ 14,891,000 ------------- ------------ ------------- ------------- Operating loss........................................ $ (8,330,000) $ (966,000) $ -- $ (9,296,000) ------------- ------------ ------------- ------------- Identifiable assets at October 31, 1996............... $ 32,690,000 $ 1,039,000 $ (3,381,000) $ 30,348,000 ------------- ------------ ------------- ------------- ------------- ------------ ------------- -------------
The Company's business is composed of two industry segments: government technology and medical technology. A summary of information relating to these divisions is presented below for the year ended October 31, 1996. Prior to 1995, the Medical Technology Division was considered insignificant and therefore not presented.
GOVERNMENT MEDICAL TECHNOLOGY TECHNOLOGY SEGMENT SEGMENT OTHER CONSOLIDATED ------------- ------------- ------------- ------------- YEAR ENDED OCTOBER 31, 1995: Revenues............................................. $ 15,597,000 $ 2,244,000 $ 466,000 $ 18,307,000 ------------- ------------- ------------- ------------- Operating profit (loss):............................. $ 765,000 $ (2,528,000) $ 466,000 $ (1,297,000) ------------- ------------- ------------- ------------- Identifiable assets at October 31, 1995:............. $ 11,433,000 $ 7,003,000 $ 9,569,000 $ 28,005,000 ------------- ------------- ------------- ------------- Depreciation and amortization:....................... $ 257,000 $ 685,000 $ 164,000 $ 1,106,000 ------------- ------------- ------------- ------------- Capital expenditures:................................ $ 118,000 $ 218,000 $ 14,000 $ 350,000 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- YEAR ENDED OCTOBER 31, 1996: Revenues............................................. $ 13,329,000 $ 1,262,000 $ 300,000 $ 14,891,000 ------------- ------------- ------------- ------------- Operating profit (loss):............................. $ (909,000) $ (8,687,000) $ 300,000 $ (9,296,000) ------------- ------------- ------------- ------------- Identifiable assets at October 31, 1996:............. $ 12,370,000 $ 7,589,000 $ 10,389,000 $ 30,348,000 ------------- ------------- ------------- ------------- Depreciation and amortization:....................... $ 376,000 $ 1,278,000 $ 89,000 $ 1,743,000 ------------- ------------- ------------- ------------- Capital expenditures:................................ $ 356,000 $ 658,000 $ 44,000 $ 1,058,000 ------------- ------------- ------------- -------------
Operating profit (loss) includes all revenues and expenses of the reportable segment, except for interest income, dividend income, other income and exchange losses. These items are shown as part of the "other." Identifiable assets are assets used in the operation of each segment. Other identifiable assets consist primarily of cash and assets that are corporate owned. Total Government Technology sales in the amounts of $4,522,000, $4,633,000 and $4,289,000 in fiscal 1996, 1995 and 1994, respectively, were made to a single European customer. All sales were export sales and are included in the United States sales to unaffiliated customers. In 1996, three domestic customers accounted for sales of $1,946,000, $1,589,000 and $1,127,000, respectively. As provided in several contracts, customers advance funds to the Company for the purpose of purchasing inventory. The related advances have been offset against these inventories. H. COMMITMENTS CHANGE IN CONTROL. The Company has agreements with three of its executive officers providing severance payments if the executive's employment is terminated within three years after a change in control of the Company (i) by the Company for reasons other than death, disability or cause or (ii) by the executive for good reason. The amount of the severance payment is 2.99 times total average compensation and cost of employee benefits for each of the five years prior to the change in control, subject to a maximum equal to the amount deductible by the Company under the Internal Revenue Code. EMPLOYMENT AGREEMENTS. The Company has employment agreements with four key employees. Three of the agreements provide for one year of compensation in the aggregate of $600,000 plus normal benefits and any amounts due under incentive compensation plans in the event the employee is terminated without cause. The fourth agreement provides for a lump sum payment in the amount of $150,000 in the event of retirement. CONSULTING AGREEMENTS. The Company has consulting agreements providing two of its directors cash compensation in the total amount of $205,000 plus expenses in fiscal 1997, assuming the agreements are renewed under similar terms and conditions, for technical marketing and investor relations services. In addition, these directors have a financial and option advisory agreement providing for success fees on any acquisition or equity offering introduced by them during the term of the agreement. LEASES. The Company entered into a sale and leaseback arrangement on October 28, 1994. Under the arrangement, the Company sold its main building in Trenton, New Jersey and agreed to lease it back for a period of 15 years under terms that qualify the arrangement as a capital lease. The buyer/lessor of the building was a partnership. Two of the partners are officers and directors of the Company. In addition, a non-interest bearing security deposit of $550,000 was paid at closing and included in other non-current assets on the balance sheet. Interest is calculated under the effective interest method and depreciation is taken using the straight line method over the term of the lease. The Company's future minimum lease payments related to the sale-leaseback arrangement in effect at October 31, 1996 are as follows: FISCAL - -------------------------------------------------- 1997.............................................. $ 560,000 1998.............................................. 560,000 1999.............................................. 560,000 2000.............................................. 615,000 2001.............................................. 615,000 2002 and thereafter............................... 5,354,000 ------------- 8,264,000 Less interest portion............................. (4,739,000) ------------- Present value of net minimum payments............. $ 3,525,000 ------------- I. LONG-TERM DEBT The Company executed an agreement to sell $10.0 million 9.01% Convertible Subordinate Debentures due August 31, 2003. Under the terms of the debentures, the holder can convert the debentures into the Company's Class A Common Stock, at $12.50 per share, 125% of the closing price on August 9, 1996. The Company has the right to call the debentures after February 28, 1998, if the Company's stock price trades at certain levels between 150%--175% of the closing price or $15-$17.50 per share. In addition, the Company's financing costs relating to this debenture amounted to approximately $.6 million. These costs are being amortized over the life of the loan. In August 1996, the Company received the proceeds from the above agreement. J. DEFERRED COMPENSATION PLANS The Company has a non-qualified deferred compensation plan that provides for compensation payments to a key individual. Distributions are generally made five years after amounts are earned. K. STOCK OPTION PLANS, WARRANTS AND RIGHTS The Company's 1990 Incentive Stock Option Plan reserves 484,000 shares of either Class A or Class B Common Stock for purchase upon the exercise of options that may not be granted at less than the fair market value as of the date of grant and that are exercisable over a period not to exceed ten years. There are no options available for grant under this plan. The Company's 1992 Stock Option Plan reserves 700,000 shares of Class A Common Stock for purchase upon the exercise of options that may not be granted at less than fair market value as of the date of grant and are exercisable over a period not to exceed ten years. There are no options available for grant under this plan. The Company's discretionary compensation plan reserves 400,000 shares of Class A Common Stock for issuance upon the exercise of options. Approximately 34,000 options remain available for grant under this plan. Options may not be granted at less than fair market value as of the date of grant and are exercisable over a period not to exceed ten years. The Company's 1995 Incentive Stock Option Plan, approved by the shareholders at the 1996 Annual Meeting of Shareholders, reserves 750,000 shares of Class A Common Stock for issuance upon the exercise of options. Approximately 189,000 options remain available for grant under this plan. Options may not be granted at less than fair market value as of the date of grant and are exercisable over a period not to exceed ten years. Information with respect to the aforementioned stock option plans is summarized as follows:
CLASS A CLASS B TOTAL ---------- ----------- ---------- Outstanding at October 31, 1993 ($3.00 to $11.59 per share).................................................. 589,331 9,946 599,277 Granted ($7.93 per share)...................................................... 400,170 -- 400,170 Exercised ($3.00 to $8.625 per share).......................................... (87,561) -- (87,561) Canceled ($8.00--$8.625 per share)............................................. (31,450) -- (31,450) Expired ($10.00 to $11.59)..................................................... (2,182) -- (2,182) ---------- ----------- ---------- Outstanding at October 31, 1994 ($3.00 to $8.875 per share).................................................. 868,308 9,946 878,254 Granted ($6.625 to $11.25 per share)........................................... 46,000 -- 46,000 Exercised ($3.00 to $8.625 per share).......................................... (104,431) (5,000) (109,431) Canceled ($8.625 per share).................................................... (26,483) -- (26,483) ---------- ----------- ---------- Outstanding at October 31, 1995 ($3.00 to $11.25 per share).................................................. 783,394 4,946 788,340 Granted ($10.20 to $11.125 per share).......................................... 560,700 -- 560,700 Exercised ($3.00 to $8.625 per share).......................................... (78,851) -- (78,851) Canceled (per share)........................................................... (3,850) -- (3,850) ---------- ----------- ---------- Outstanding at October 31, 1996 ($3.00 to $11.125 per share)................................................. 1,261,393 4,946 1,266,339 ---------- ----------- ---------- ---------- ----------- ---------- Exercisable at October 31, 1996................................................ 686,407 4,946 691,353 ---------- ----------- ---------- ---------- ----------- ----------
The Company has issued 895,000 warrants and 522,000 options to consultants and three non-management directors at prices ranging from $3.00 to $11.75, expiring from 1997 to 2004. None of these warrants or options have expired to date. Included in the above are 250,000 warrants issued to consultants for services related to the promotion and selling of the Company's stock at an exercise price which was less than the fair market value of the stock at the date of the grant. The remaining options and warrants were issued at fair market value at the date of grant. One consultant and one director have exercised warrants or options for a total of 34,000 shares during fiscal 1996 at prices ranging from $4.00 to $7.25 per share. The Board of Directors have issued options to various employees to purchase a total of 229,000 shares of Class A Common Stock. The options have exercise prices ranging from $7.25 to $10.50 per share (fair market value at the date of grant), expiring from 2000 to 2006. Employees have exercised options for a total of 24,500 shares during fiscal 1996 at $8.50. L. EMPLOYEE BENEFIT PLAN In 1986, the Company adopted a benefit plan under section 401(k) of the Internal Revenue Code. In November 1995, the plan was amended to allow for a 1% base annual salary Company matching contribution for each eligible employee. The plan allows all eligible employees to defer up to 17% of their pre-tax income through contributions to the plan. M. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS The Company has restated its consolidated financial statements for the years ended October 31, 1996 and 1995. Subsequent to the issuance of the Company's 1996 consolidated financial statements, the Company's management determined that certain temporary salary reductions for certain officers of the Company during fiscal 1995, and loans made to such officers to be repaid by future bonuses, should have been recorded as an increase to compensation expense with a corresponding increase to additional paid-in-capital in the Company's 1995 consolidated financial statements. As a result, the Company's1996 and 1995 consolidated financial statements have been restated from the amounts previously reported to record these loans as a charge to operations and as an increase to additional paid-in-capital in fiscal 1995. The impact of these adjustments was to increase the previously reported 1995 net loss by $502,000 and net loss per common share by $.07. The restatement had no effect on the Company's cash position. A summary of the significant effects of the restatement is as follows (dollar amounts in thousands, except per share data); AS PREVIOUSLY AS REPORTED RESTATED ---------- --------- YEAR ENDED OCTOBER 31, 1995: Selling, general and administrative expense....... $ 5,796 6,298 Total operating expenses.......................... 19,656 20,158 Loss before income tax benefit.................... (1,349) (1,851) Net loss.......................................... (875) (1,377) Net loss per common share......................... (.13) (.20) ---------- --------- ---------- --------- AT OCTOBER 31, 1995: Additional paid-in capital........................ $ 23,908 24,410 Accumulated deficit............................... (11,179) (11,681) ---------- --------- ---------- --------- AT OCTOBER 31, 1996: Additional paid-in capital........................ $ 24,584 25,086 Accumulated deficit............................... (21,138) (20,640) [This page intentionally left blank] BASE TEN SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AS OF AS OF OCTOBER 31, JULY 31, 1997 1996 -------------- --------------- (UNAUDITED) (AUDITED) ASSETS CURRENT ASSETS: Cash.......................................................................... $ 3,771,000 $ 7,465,000 Accounts receivable (including unbilled receivables of $4,122,000 in 1997 and $3,902,000 in 1996)......................................................... 7,181,000 7,515,000 Inventories................................................................... 3,868,000 2,935,000 Current portion of employee loan receivable................................... 128,000 128,000 Other current assets.......................................................... 601,000 386,000 -------------- --------------- TOTAL CURRENT ASSETS........................................................ 15,549,000 18,429,000 PROPERTY, PLANT AND EQUIPMENT................................................... 5,209,000 5,071,000 EMPLOYEE LOAN RECEIVABLE........................................................ 47,000 148,000 OTHER ASSETS.................................................................... 8,717,000 6,700,000 -------------- --------------- $ 29,522,000 $ 30,348,000 -------------- --------------- -------------- --------------- LIABILITIES AND SHAREHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable.............................................................. $ 1,045,000 $ 1,472,000 Accrued expenses.............................................................. 3,693,000 2,994,000 Current portion of capital lease obligation................................... 54,000 47,000 -------------- --------------- TOTAL CURRENT LIABILITIES................................................... 4,792,000 4,513,000 LONG-TERM LIABILITIES: Other long-term liabilities................................................... 272,000 266,000 Capital lease obligation...................................................... 3,441,000 3,478,000 Long-term debt................................................................ 15,500,000 10,000,000 -------------- --------------- TOTAL LONG-TERM LIABILITIES................................................. 19,213,000 13,744,000 SHAREHOLDERS' EQUITY Preferred stock, $1.00 par value, authorized and unissued--1,000,000 shares... -- -- Class A Common Stock, $1.00 par value, 22,000,000 shares authorized; issued and outstanding 7,497,360 shares in 1997 and 7,358,964 shares in 1996....... 7,497,000 7,359,000 Class B Common Stock, $1.00 par value, 2,000,000 shares authorized; issued and outstanding 445,121 shares in 1997 and 445,387 shares in 1996............... 445,000 445,000 Additional paid-in capital.................................................... 25,603,000 25,086,000 Deficit....................................................................... (27,885,000) (20,640,000) -------------- --------------- 5,660,000 12,250,000 Equity adjustment from foreign currency translation........................... (143,000) (159,000) -------------- --------------- 5,517,000 12,091,000 -------------- --------------- $ 29,522,000 $ 30,348,000 -------------- ---------------
See Notes to Consolidated Financial Statements BASE TEN SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED THREE MONTHS ENDED JULY 31 JULY 31 ---------------------------- ---------------------------- 1997 1996 1997 1996 ------------- ------------- ------------- ------------- REVENUES Sales.............................................. $ 9,808,000 $ 10,352,000 $ 3,618,000 $ 2,973,000 Other.............................................. 133,000 150,000 20,000 59,000 9,941,000 10,502,000 3,638,000 3,032,000 COSTS AND EXPENSES: Cost of sales...................................... 8,322,000 7,683,000 3,430,000 2,489,000 Research and development........................... 490,000 811,000 158,000 249,000 Selling, general and administrative................ 6,114,000 6,316,000 2,018,000 2,421,000 Write-off of software development costs............ -- 2,429,000 -- -- Amortization of software medical cost.............. 1,121,000 807,000 440,000 246,000 Interest........................................... 1,139,000 392,000 409,000 132,000 ------------- ------------- ------------- ------------- 17,186,000 18,438,000 6,455,000 5,537,000 ------------- ------------- ------------- ------------- LOSS BEFORE INCOME TAXES............................. (7,245,000) (7,936,000) (2,817,000) (2,505,000) INCOME TAXES......................................... -- -- -- -- ------------- ------------- ------------- ------------- NET LOSS............................................. $ (7,245,000) $ (7,936,000) $ (2,817,000) $ (2,505,000) NET LOSS PER COMMON SHARE............................ $ (.92) $ (1.04) $ (.35) $ (.33) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING........... 7,852,453 7,660,300 7,928,516 7,565,040
See Notes to Consolidated Financial Statements BASE TEN SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY NINE MONTHS ENDED JULY 31, 1997 (UNAUDITED)
COMMON STOCK EQUITY ------------------------------------------------ ADJUSTMENT FROM CLASS A CLASS B ADDITIONAL FOREIGN ------------------------- --------------------- PAID-IN CURRENCY SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TRANSLATION ----------- ------------ --------- ---------- ------------- -------------- ----------- Balance - October 31, 1996............ 7,358,964 $ 7,359,000 445,387 $ 445,000 $ 25,086,000 $ (20,640,000) $ (159,000) Conversions of Class B Common to Class A Common.......... 266 (266) Exercise of options......... 132,043 132,000 517,000 Issuance of Common Stock........... 6,087 6,000 Foreign currency translation..... 16,000 Net loss.......... (7,245,000) ----------- ------------ --------- ---------- ------------- -------------- ----------- Balance - July 31, 1997..... 7,497,360 $ 7,497,000 445,121 $ 445,000 $ 25,603,000 $ (27,885,000) $ (143,000) ----------- ------------ --------- ---------- ------------- -------------- ----------- ----------- ------------ --------- ---------- ------------- -------------- -----------
See Notes to Consolidated Statements F-21 BASE TEN SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JULY 31, ---------------------------- 1997 1996 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss.......................................................................... $ (7,245,000) $ (7,936,000) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES: Depreciation and amortization..................................................... 1,474,000 1,224,000 Write-off of software development costs........................................... -- 2,429,000 Accounts receivable............................................................... 352,000 270,000 Inventories....................................................................... (934,000) 80,000 Other current assets.............................................................. (110,000) 67,000 Accounts payable.................................................................. (400,000) (210,000) Accrued expenses.................................................................. 295,000 836,000 Customers' advance payments....................................................... 390,000 158,000 Deferred compensation............................................................. -- (66,000) Other Assets...................................................................... (3,147,000) (2,622,000) Other long-term liabilities....................................................... 6,000 (14,000) Income taxes payable.............................................................. -- (3,000) ------------- ------------- NET CASH USED IN OPERATIONS......................................................... (9,319,000) (5,787,000) ------------- ------------- CASH FLOWS USED IN INVESTING ACTIVITIES: Additions to property, plant and equipment-net.................................... (487,000) (697,000) ------------- ------------- NET CASH USED IN INVESTING ACTIVITIES............................................... (487,000) (697,000) ------------- ------------- CASH FLOWS PROVIDED FROM (USED IN) FINANCING ACTIVITIES: Repayment of amounts borrowed..................................................... (31,000) (32,000) Proceeds from Issuance of Convertible Debenture................................... 5,500,000 -- Proceeds from issuance of common stock............................................ 655,000 569,000 ------------- ------------- NET CASH PROVIDED FROM FINANCING ACTIVITIES....................................... 6,124,000 537,000 Effect of exchange rate change on cash............................................ (12,000) (14,000) ------------- ------------- NET DECREASE IN CASH................................................................ (3,694,000) (5,961,000) CASH, beginning of period........................................................... 7,465,000 7,221,000 ------------- ------------- CASH, end of period................................................................. $ 3,771,000 $ 1,260,000 ------------- ------------- ------------- ------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW: Cash paid during the period for interest.......................................... $ 1,089,000 $ 390,000 ------------- ------------- SUPPLEMENTAL SCHEDULE OF NON-CASHINVESTING AND FINANCING ACTIVITIES: Retirement of treasury stock...................................................... $ -- $ 7,000 ------------- -------------
See Notes to Consolidated Financial Statements BASE TEN SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED JULY 31, 1997 (UNAUDITED) A. DESCRIPTION OF BUSINESS Base Ten Systems, Inc. ("Base Ten" or the "Company") is engaged in the design and manufacture of electronic systems employing safety critical software for defense markets and the development of commercial applications focused on manufacturing execution systems, medical screening and image processing software. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: 1. In management's opinion, all adjustments, of a normal recurring nature, necessary for a fair presentation of the financial statements are reflected in the accompanying statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The consolidated interim financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1996. The results of operations for the three months and nine months ended July 31, 1997 are not necessarily indicative of the operating results for the full year. 2. BASIS OF PRESENTATION--The Company's consolidated financial statements have been prepared on a historical cost basis. 3. PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the accounts of Base Ten. All significant intercompany accounts, transactions and profits have been eliminated. 4. REVENUE RECOGNITION--For Medical Software Products, the Company evaluates each product and order on an individual basis to determine the proper revenue recognition method. Contracts to deliver software which require significant customization or modification for an extended period of time are accounted for under the percentage of completion method. For the products or orders which are more standardized in nature, revenue is recognized on delivery. For products in the Government Technology Division revenues on long-term contracts are recognized on the percentage-of-completion or unit-of-delivery basis. Changes in estimates are accounted for using the cumulative catch-up method and are immaterial in each period presented. On contracts where the percentage-of-completion method is used, costs and estimated revenues in excess of progress billings are presented as unbilled receivables. Unbilled costs of unit-of-delivery contracts are included in inventory. Payments received in excess of costs incurred on long-term contracts are recorded as customers' advance payments, which are included as a reduction of inventory on the balance sheet. 5. INVENTORIES--Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventoried costs on contracts include direct material, labor and applicable overhead. In accordance with industry practice, inventoried costs include amounts relating to contracts with a long production cycle, some of which are not expected to be realized within one year 6. PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are carried at cost and depreciated over estimated useful lives, principally on the straight-line method. The estimated useful lives used for the determination of depreciation and amortization are: Leased asset--building........................................ 15 years 3 to 10 Machinery and equipment....................................... years 3 to 20 Furniture and fixtures........................................ years 7. WRITE-OFF OF CAPITALIZED SOFTWARE DEVELOPMENT COSTS--A portion of the Company's software development costs since 1991 have been capitalized and included in other non-current assets in accordance with the Statement of Financial Accounting Standard No. 86, "Accounting for Costs for Computer Software to be Sold, Leased or Otherwise Marketed" (SFAS 86), requiring the amortization of these costs over the estimated economic life of the product. See "Other Assets" below. The Company performs quarterly reviews of the recoverability of its capitalized software costs based on anticipated revenues and cash flows from sales of these products. In the second quarter of fiscal 1996 the Company conducted its regular quarterly review of the recoverability of its capitalized software development costs and determined that neither its PRENVAL nor its uPACS products would achieve sufficient revenues in future periods to justify retention of the related capitalized costs as productive assets. To confirm its determination, the Company reviewed the marketing chronology related to these products. With respect to PRENVAL, it became apparent to the Company in late February 1996, after a discussion with the licensee, that enhancements that are not developed or available for the product were being requested by customers who had a chance to use and test the product during the first quarter of fiscal 1996, and that, as a result, sales would not exceed the amount necessary to generate additional royalties in excess of the minimum required under the license. Thereafter, in May 1996, the Company determined that the licensee had no current plans to market the product in the U.S. as was originally anticipated by the Company. With respect to uPACS, the Company has implemented sales efforts in late 1995 and displayed the product at certain trade shows in Europe. In December 1995, sales were anticipated for early 1996. However, by early April 1996 it became clear that the anticipated sales would not materialize. The Company concluded that the product, as it then existed, would not generate sufficient sales to recover the capitalized costs, and that only a new product with networking, communications and off-line measurement capabilities was marketable. Accordingly the Company wrote off $2.4 million of such capitalized costs in the 1996 second fiscal quarter. 8. OTHER ASSETS--Included in other non-current assets are software development costs capitalized in accordance with SFAS 86, "Accounting for Costs for Computer Software to be Sold, Leased or Otherwise Marketed", pursuant to which the Company is required to capitalize certain software development and production costs once technological feasibility has been achieved. The cost of purchased software is capitalized when related to a product which has achieved technological feasibility or that has an alternative future use. Software development costs incurred prior to achieving technological feasibility are charged to research and development expense as incurred. The Company performs quarterly reviews of the recoverability of its capitalized software costs and other long lived assets based on anticipated revenues and cash flows from sales of these products. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows at the rate the Company utilizes to evaluate potential investments. The Company estimates fair value based on the best information available making whatever estimates, judgments and projections are considered necessary. Commencing upon initial product release, these costs are amortized based on the straight-line method over the estimated life. 9. CASH AND CASH EQUIVALENTS--The Company considers all investments with a maturity of three months or less at date of acquisition to be cash equivalents. 10. INCOME TAXES--Effective November 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), which requires a change from the deferred method's income statement approach of accounting for income taxes to an asset and liability approach of accounting for income taxes. Under the asset and liability approach, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. This change has not had any effect on the Company's Consolidated Statement of Operations. 11. RECENTLY ISSUED ACCOUNTING STANDARDS--In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which required adoption of the disclosure provisions no later than fiscal years beginning after December 15, 1995 and adoption of the recognition and measurement provisions for nonemployee transactions no later than after December 15, 1995. The new standard defines a fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Pursuant to the new standard, companies are encouraged, but are not required, to adopt the fair value method of accounting for employee stock-based transactions. Companies are also permitted to continue to account for such transactions under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees, but requires disclosure in a note to the financial statements pro forma net income and, if presented, earnings per share as if the Company had applied the new method of accounting for all grants after November 1, 1995. The accounting requirements of the new method are effective for all employee awards granted after the beginning of the fiscal year of adoption. The Company has elected to continue to account for employee stock-based transactions under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and will include the required disclosures under SFAS 123 in the Company's financial statements and notes thereto to be included in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1997. The Financial Accounting Standards Board issued Statement of Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"). The Company is required to adopt FAS 128 for both interim and annual periods ending after December 15, 1997. FAS 128 requires the Company to present Basic Earnings Per Share which excludes dilution and Diluted Earnings Per Share which includes potential dilution. The Company believes that the adoption of FAS 128 will not have a material effect on the Company's earning per share calculations. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for financial statement periods beginning after December 15, 1997. This statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. The Company believes that the information to be included in deriving comprehensive income, although not currently presented in a separate financial statement, is disclosed as a part of these financial statements. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" which is effective for financial statement periods beginning after December 15, 1997. This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that these enterprises report selected information about operating segments in interim financial reports issued to shareholders. This Statement supersedes SFAS No. 14 and amends SFAS No. 94. The Company is currently evaluating the impact to its current financial statements of the implementation of SFAS 131. 12. NET EARNINGS/(LOSS) PER SHARE--Earnings per share for periods ended July 31, 1997 and 1996 were calculated using the number of weighted average common shares outstanding. Stock options, warrants and rights would have an anti-dilutive effect on earnings per share for the periods included. 13. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. 14. FAIR VALUE OF FINANCIAL INSTRUMENTS--The fair market value of certain financial instruments, including cash, accounts receivable, accounts payable, and other accrued liabilities, approximate the amount recorded in the balance sheet because of the relatively current maturities of these financial instruments. The fair market value of long term debt at July 31, 1997 and October 31, 1996 approximates the amounts recorded in the balance sheet based on information available to the Company with respect to interest rates and terms for similar financial instruments. 15. FOREIGN CURRENCY TRANSLATION--The accounts of the consolidated foreign subsidiaries are translated into United States dollars in accordance with Financial Accounting Standards Board (FASB) Statement No. 52. Transaction gains and losses are immaterial. 16. CHANGE IN PRESENTATION--Certain balance sheet items for the interim period in fiscal 1996 have been reclassified to conform to the 1997 presentation. NINE MONTHS ENDED JULY 31, 1997 (UNAUDITED) C. INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out method) or market.
JULY 31, OCTOBER 31, 1997 1996 ------------ --------------- Raw materials................................................. $1,287,000 $ 1,232,000 Work in process............................................... 2,321,000 1,383,000 Finished goods................................................ 578,000 369,000 ------------ --------------- 4,186,000 2,984,000 Less advance payments......................................... 318,000 49,000 ------------ --------------- $3,868,000 $ 2,935,000 ------------ ---------------
As provided in several of the Company's contracts, customers advance funds to Base Ten for the purpose of purchasing inventory. The related advances have been offset against inventory. D. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are summarized as follows:
OCTOBER 31, JULY 31, 1997 1996 ------------- --------------- Machinery and equipment...................................... $ 10,105,000 $ 9,668,000 Furniture and fixtures....................................... 723,000 705,000 Leased asset--land and building.............................. 3,600,000 3,600,000 ------------- --------------- Leasehold improvement........................................ 120,000 85,000 ------------- --------------- 14,548,000 14,058,000 Less accumulated depreciation and amortization............... 9,339,000 8,987,000 ------------- --------------- $ 5,209,000 $ 5,071,000 ------------- ---------------
E. OTHER ASSETS:
JULY 31, OCTOBER 31, 1997 1996 ------------ --------------- Patents (net of amortization)................................. $ 386,000 $ 362,000 Capitalized costs............................................. 6,313,000 4,255,000 Unamortized bond issue costs.................................. 1,104,000 579,000 Deposit--long-term capital lease.............................. 550,000 550,000 Long-term receivable.......................................... 200,000 770,000 Other......................................................... 164,000 184,000 ------------ --------------- $8,717,000 $ 6,700,000 ------------ ---------------
F. LONG-TERM CAPITAL LEASE: LEASES. The Company entered into a sale and leaseback arrangement on October 28, 1994. Under the arrangement, the Company sold its main building in Trenton, New Jersey and agreed to lease it back for a period of 15 years under terms that qualify the arrangement as a capital lease. The buyer/lessor of the building was a partnership. One of the partners is a current officer and director of the Company. In addition, a non-interest bearing security deposit of $550,000 was paid at closing and included in other non-current assets on the balance sheet. Interest is calculated under the effective interest method and depreciation will be taken using the straight line method over the term of the lease. The Company's future minimum lease payments related to the sale-leaseback arrangement in effect at July 31, 1997 are as follows: FISCAL - ---------------------------------------------------- 1997................................................ $ 560,000 1998................................................ 560,000 1999................................................ 560,000 2000................................................ 615,000 2001................................................ 615,000 2002 and thereafter................................. 5,344,000 ------------- 8,254,000 Less: Interest portion.............................. (4,759,000) ------------- Present value of net minimum payments............... $ 3,495,000 ------------- ------------- G. LONG-TERM DEBT: In August 1996, the Company sold $10.0 million of its 9.01% Convertible Subordinate Debentures due August 31, 2003. Under the terms of the Debentures, the holder can convert the Debentures into the Company's Class A Common Stock, at $12.50 per share, 125% of the closing price on August 9, 1996. The Company has the right to call the Debentures after February 28, 1998, if the Company's stock price trades at certain levels between 150%--175% of the closing price, or $15-$17.50 per share. The Company's financing costs relating to such Debentures amounted to approximately $.6 million. These costs are being amortized over the life of the loan. In May 1997, the Company sold 55 units ("Units") at $100,000 per Unit, for an aggregate of $5,500,000. Each Unit consists of (i) a convertible debenture ("Convertible Debenture") in the principal amount of $100,000 convertible into shares of the Company's Class A Common Stock, and (ii) a warrant ("Warrant") to acquire 1,800 shares of Class A Common Stock. The number of shares of Class A Common Stock issuable upon conversion of the Convertible Debentures is variable. The number of shares will be calculated at the time of conversion and will be the lesser of (i) the product obtained by multiplying (x) the lesser of the average of the closing bid prices for the Class A Common Stock for the (A) five or (B) thirty consecutive trading days ending on the trading day immediately preceding the date of determination by (y) a conversion percentage equal to 95% with respect to any conversions occurring prior to February 24, 1998 and 92% with respect to any conversions occurring on or after February 24, 1998 and (ii) $13.50 with respect to any conversions occurring prior to May 30, 1998 or $14.00 with respect to any conversions occurring on or after May 30, 1998. The Convertible Debentures are not convertible prior to December 16, 1997. From December 16, 1997 until February 23, 1998, one-half of the Convertible Debentures may be converted and after February 23, 1998, the Convertible Debentures are fully convertible. The Warrants may be exercised at any time through May 30, 2002 at an exercise price of $12.26 per share. The Company received net proceeds of approximately $4,950,000 from the sale of the Units after deduction of fees and expenses related to the Offering. H. OTHER ARRANGEMENTS On May 1, 1997, the Company entered into an agreement whereby it became a minority owner of uPACS LLC, a limited liability company (the "LLC"). Under the terms of the agreement, the Company made a capital contribution to the LLC of its rights to its uPACS technology which is a system for archiving ultrasound images with networking, communication and off-line measurement capabilities. In exchange for such capital contribution, the Company received a 9% interest in the LLC. An outside investor made a capital contribution of $2 million and agreed to make a further capital contribution of $1 million on or before December 1, 1997, in return for a 91% interest in the LLC. In connection with the formation of the LLC, the Company entered into a Services and License Agreement whereby the Company has agreed to complete the development of the uPACS technology and undertake to market, sell and distribute systems using the uPACS technology. The LLC will pay the Company its expenses in connection with such services and the Company will pay to the LLC royalties in connection with the sale of systems using the uPACS technology. At such time as the LLC has distributed to the outside investor an aggregate amount equal to $4.5 million of its net cash flow, the Company would become a 63% owner of the LLC and the outside investor will own a 37% interest in the LLC. There can be no assurance that uPACS will be successful or that the LLC will operate profitably or that the funds under the LLC will be sufficient for the further development and marketing of uPACS. EXHIBIT A TO PROXY STATEMENT October 27, 1997 Special Committee of the Board of Directors Base Ten Systems, Inc. One Electronics Drive Trenton, New Jersey 08619 Gentlemen: You have requested our opinion as investment bankers as to the fairness, from a financial point of view, to Base Ten Systems, Inc. ("Base Ten" or the "Company") of the consideration to be received for substantially all the assets and certain liabilities of the Government Technology Division ("GTD") of the Company pursuant to the proposed transaction (the "Transaction"), as set forth in the Asset Purchase Agreement dated October 27, 1997 (the "Agreement"), by and between the Company and Strategic Technologies, Inc. (the "Buyer"), a newly formed corporation that will be managed by certain members of senior management of the Company who are currently involved in the operations of GTD. Capitalized terms not otherwise defined herein shall have the meanings given to such terms in the Agreement. As more specifically set forth in the Agreement and subject to certain terms and conditions thereof, the Buyer will pay to the Company consideration as follows: (i) $3,900,000 in cash, of which $400,000 is contingent upon receipt of a certain customer contract within 12 months following Closing (the "Cash Payment"), (ii) a five year promissory note (the "Purchase Note") bearing interest at a 7.5% annual rate with a principal amount equal to the estimated Net Asset Value of GTD at Closing minus $3,100,000, (iii) a warrant (the "Warrant") to purchase 5% of Buyer at any time during the five year period following the initial public offering ("IPO") of the Buyer at an exercise price equal to 5% of two times the sum of (x) the Cash Payment, (y) the Purchase Note and (z) any additional cash contributed or loaned to the Buyer prior to or within 30 days following the Closing Date, and (iv) the right (the "Disposition Right") to receive 15% of the gross proceeds above $7,000,000 for a sale, merger or liquidation of the Buyer that occurs prior to the Buyer's IPO provided that the Warrant has been canceled. In addition the Buyer has agreed to enter into a five year lease for office and manufacturing space with estimated annual rent, taxes, utilities and maintenance payments totaling $486,000 in years one through three and $509,570 in years four and five. In the ordinary course of its services, Cowen & Company ("Cowen") is regularly engaged in the valuation and pricing of businesses and their securities and in advising corporate securities issuers on related matters. In arriving at our opinion, Cowen has, among other things: (1) reviewed the Agreement; (2) reviewed the Company's consolidated financial statements for the nine months ended July 31, 1997 and the fiscal years ended October 31, 1996, 1995 and 1994, certain publicly available filings with the Securities and Exchange Commission and certain other relevant financial and operating data of the Company; (3) reviewed GTD's financial statements as prepared by management of the Company for the nine months ended July 31, 1997 and the fiscal years ended October 31, 1996 and 1995 and certain other relevant financial and operating data of GTD; (4) held meetings and discussions with management and senior personnel of the Company to discuss the business, operations, historical financial results and future prospects of GTD; (5) reviewed financial projections furnished to us by the management of the Company, including among other things, the capital structure, sales, net income, cash flow, capital requirements and other data of GTD we deemed relevant; (6) reviewed the historical prices of the Class A and Class B common stock of the Company from October 13, 1996 to October 13, 1997 and compared those trading histories with those of market indices which we deemed relevant; (7) reviewed the valuation of GTD in comparison to other similar publicly traded companies; (8) compared the financial terms, to the extent publicly available, of the Transaction to selected business transactions deemed to be comparable in whole or in part; (9) conducted a discounted cash flow analysis of GTD based on financial projections provided to us by management of the Company; (10) analyzed potential pro forma financial effects of the Transaction contemplated by the Agreement; and (11) conducted such other studies, analysis, inquiries and investigations as we deemed appropriate. At the request of the Company, Cowen solicited an indication of interest to acquire substantially all of the assets of GTD from a third party. In rendering our opinion, we relied upon the Company's management with respect to the accuracy and completeness of the financial and other information furnished to us as described above. We assumed that financial forecasts, projections and estimates reflected the best currently available estimates and judgments of the Company's management as to the expected future financial performance of GTD. We have not assumed any responsibility for independent verification of such information, including financial information, nor have we made an independent evaluation or appraisal of any of the properties or assets of GTD. With respect to all legal matters relating to the Company and Buyer, we have relied on the advice of legal counsel to the Company. Our opinion is necessarily based on general economic, market financial and other conditions as they exist on, and can be evaluated as of, the date hereof, as well as the information currently available to us. It should be understood that, although subsequent developments may affect our opinion, we do not have any obligation to update, revise or reaffirm our opinion. Our opinion does not constitute a recommendation to any stockholder as how to such stockholder should vote on the proposed Transaction. Our opinion does not imply any conclusion as to the likely trading range for the common stock of the Company following consummation of the Transaction or otherwise, which may vary depending on numerous factors that generally influence the price of securities. Our opinion is limited to the fairness, from a financial point of view, of the terms of the Transaction. We express no opinion with respect to any other reasons, legal, business or otherwise, that may support the decision of the Special Committee to approve, or the Company's decision to consummate, the Transaction. For purposes of rendering our opinion we have assumed in all respects material to our analysis, that the representations and warranties of each party contained in the Agreement are true and correct, that each party will perform all of the covenants and agreements required to be performed by it under the Agreement and that all conditions to the consummation of the Transaction will be satisfied without waiver thereof. We have also assumed that all governmental, regulatory or other consents and approvals contemplated by the Agreement will be obtained and that in the course of obtaining any of those consents no restrictions will be imposed or waivers made that would have an adverse effect on the contemplated benefits of the Transaction. We have acted as financial advisor to the Special Committee of the Board of Directors of the Company in connection with the Transaction contemplated by the Agreement and will receive a fee for rendering this opinion which is not contingent upon consummation of the Transaction. Cowen and its affiliates are providing financing services for the Company and will receive fees for rendering such services. In addition, in the ordinary course of its business, Cowen may trade the securities of the Company for its own account and for the accounts of its customers, and, accordingly, it may at any time hold a long or short position in such securities. On the basis of our review and analysis, as described above, it is our opinion as investment bankers that, as of the date hereof, the financial terms of the Transaction are fair, from a financial point of view, to the Company. Very truly yours, Cowen & Company EXHIBIT B TO PROXY STATEMENT EXCERPTS FROM CHAPTER 11 OF THE NEW JERSEY BUSINESS CORPORATION ACT 14A:11-1. RIGHT OF SHAREHOLDERS TO DISSENT (1) Any shareholder of a domestic corporation shall have the right to dissent from any of the following corporate actions * * * (b) Any sale, lease, exchange or other disposition of all or substantially all of the assets of a corporation not in the usual or regular course of business as conducted by such corporation, * * * provided that, unless the certificate of incorporation otherwise provides, the shareholder shall not have the right to dissent (i) with respect to shares of a class or series which, at the record date fixed to determine the shareholders entitled to vote upon such transaction, is listed on a national securities exchange or is held of record by not less than 1,000 holders; * * * (3) A shareholder may not dissent as to less than all of the shares owned beneficially by him and with respect to which a right of dissent exists. A nominee or fiduciary may not dissent on behalf of any beneficial owner as to less than all of the shares of such owner with respect to which the right of dissent exists. * * * 14A:11-2. NOTICE OF DISSENT; DEMAND FOR PAYMENT; ENDORSEMENT OF CERTIFICATES (1) Whenever a vote is to be taken upon a proposed corporate action from which a shareholder may dissent under section 14A:11-1, any shareholder electing to dissent from such action shall file with the corporation before the taking of the vote of the shareholders on such corporate action, * * * a written notice of such dissent stating that he intends to demand payment for his shares if the action is taken. (2) Within 10 days after the date on which such corporate action takes effect, the corporation, the surviving or new corporation, shall give written notice of the effective date of such corporate action, by certified mail to each shareholder who filed written notice of dissent pursuant to subsection 14A:11-2(1), except any who voted for or consented in writing to the proposed action. (3) Within 20 days after the mailing of such notice, any shareholder to whom the corporation was required to give such notice and who has filed a written notice of dissent pursuant to this section may make written demand on the corporation, or, in the case of a merger or consolidation, on the surviving or new corporation, for the payment of the fair value of his shares. * * * (6) Not later than 20 days after demanding payment for his shares pursuant to this section, the shareholder shall submit the certificate or certificates representing his shares to the corporation upon which such demand has been made for notation thereon that such demand has been made, whereupon such certificate or certificates shall be returned to him. If shares represented by a certificate on which notation has been made shall be transferred, each new certificate issued therefor shall bear similar notation, together with the name of the original dissenting holder of such shares, and a transferee of such shares shall acquire by such transfer no rights in the corporation other than those which the original dissenting shareholder had after making a demand for payment of the fair value thereof. (7) Every notice or other communication required to be given or made by a corporation to any shareholder pursuant to this Chapter shall inform such shareholder of all dates prior to which action must be taken by such shareholder in order to perfect his rights as a dissenting shareholder under this Chapter. 14A:11-3. "DISSENTING SHAREHOLDER" DEFINED; DATE FOR DETERMINATION OF FAIR VALUE (1) A shareholder who has made demand for the payment of his shares in the manner prescribed by [subsection] 14A:11-2(3) is hereafter in this Chapter referred to as a "dissenting shareholder". (2) Upon making such demand, the dissenting shareholder shall cease to have any of the rights of a shareholder except the right to be paid the fair value of his shares and any other rights of a dissenting shareholder under this Chapter. (3) "Fair value" as used in this Chapter shall be determined (a) As of the day prior to the day of the meeting of shareholders at which the proposed action was approved * * * In all cases, "fair value" shall exclude any appreciation or depreciation resulting from the proposed action. 14A:11-4. TERMINATION OF RIGHT OF SHAREHOLDER TO BE PAID THE FAIR VALUE OF HIS SHARES (1) The right of a dissenting shareholder to be paid the fair value of his shares under this Chapter shall cease if (a) he has failed to present his certificates for notation as provided by subsection 14A:11-2(6), unless a court having jurisdiction, for good and sufficient cause shown, shall otherwise direct; (b) his demand for payment is withdrawn with the written consent of the corporation; (c) the fair value of the shares is not agreed upon as provided in this Chapter and no action for the determination of fair value by the Superior Court is commenced within the time provided in this Chapter; (d) the Superior Court determines that the shareholder is not entitled to payment for his shares; (e) the proposed corporate action is abandoned or rescinded; or (f) a court having jurisdiction permanently enjoins or sets aside the corporate action. (2) In any case provided for in subsection 14A:11-4(1), the rights of the dissenting shareholder as a shareholder shall be reinstated as of the date of the making of a demand for payment pursuant to [subsection] 14A:11-2(3) without prejudice to any corporate action which has taken place during the interim period. In such event, he shall be entitled to any intervening preemptive rights and the right to payment of any intervening dividend or other distribution, or, if any such rights have expired or any such dividend or distribution other than in cash has been completed, in lieu thereof, at the election of the board, the fair value thereof in cash as of the time of such expiration or completion. 14A:11-5. RIGHTS OF DISSENTING SHAREHOLDER (1) A dissenting shareholder may not withdraw his demand for payment of the fair value of his shares without the written consent of the corporation. (2) The enforcement by a dissenting shareholder of his right to receive payment for his shares shall exclude the enforcement by such dissenting shareholder of any other right to which he might otherwise be entitled by virtue of share ownership, except as provided in subsection 14A:11-4(2) and except that this subsection shall not exclude the right of such dissenting shareholder to bring or maintain an appropriate action to obtain relief on the ground that such corporate action will be or is ultra vires, unlawful or fraudulent as to such dissenting shareholder. 14A:11-6. DETERMINATION OF FAIR VALUE BY AGREEMENT (1) Not later than 10 days after the expiration of the period within which shareholders may make written demand to be paid the fair value of their shares, the corporation upon which such demand has been made pursuant to [subsection] 14A:11-2(3) * * * shall mail to each dissenting shareholder the balance sheet and the surplus statement of the corporation whose shares he holds, as of the latest available date which shall not be earlier than 12 months prior to the making of such offer and a profit and loss statement or statements for not less than a 12-month period ended on the date of such balance sheet or, if the corporation was not in existence for such 12-month period, for the portion thereof during which it was in existence. The corporation may accompany such mailing with a written offer to pay each dissenting shareholder for his shares at a specified price deemed by such corporation to be the fair value thereof. Such offer shall be made at the same price per share to all dissenting shareholders of the same class, or, if divided into series, of the same series. (2) If, not later than 30 days after the expiration of the 10-day period limited by subsection 14A:11-6(1), the fair value of the shares is agreed upon between any dissenting shareholder and the corporation, payment therefor shall be made upon surrender of the certificate or certificates representing such shares. 14A:11-7. PROCEDURE ON FAILURE TO AGREE UPON FAIR VALUE; COMMENCEMENT OF ACTION TO DETERMINE FAIR VALUE (1) If the fair value of the shares is not agreed upon within the 30-day period limited by subsection 14A:11-6(2), the dissenting shareholder may serve upon the corporation which such demand has been made pursuant to [subsection] 14A:11-2(3) a written demand that it commence an action in the Superior Court for the determination of the fair value of the shares. Such demand shall be served not later than 30 days after the expiration of the 30-day period so limited and such action shall be commenced by the corporation not later than 30 days after receipt by the corporation of such demand, but nothing herein shall prevent the corporation from commencing such action at any earlier time. (2) If a corporation fails to commence the action as provided in subsection 14A:11-7(1), a dissenting shareholder may do so in the name of the corporation, not later than 60 days after the expiration of the time limited by subsection 14A:11-7(1) in which the corporation may commence such an action. 14A:11-8. ACTION TO DETERMINE FAIR VALUE; JURISDICTION OF COURT; APPOINTMENT OF APPRAISER In any action to determine the fair value of shares pursuant to this Chapter: (a) The Superior Court shall have jurisdiction and may proceed in the action in a summary manner or otherwise; (b) All dissenting shareholders, wherever residing, except those who have agreed with the corporation upon the price to be paid for their shares, shall be made parties thereto as an action against their shares quasi in rem; (c) the court in its discretion may appoint an appraiser to receive evidence and report to the court on the question of fair value, who shall have such power and authority as shall be specified in the order of his appointment; and (d) The court shall render judgment against the corporation and in favor of each shareholder who is a party to the action for the amount of the fair value of his shares. 14A:11-9. JUDGMENT IN ACTION TO DETERMINE FAIR VALUE (1) A judgment for the payment of the fair value of shares shall be payable upon surrender to the corporation of the certificate or certificates representing such shares. (2) The judgment shall include an allowance for interest at such rate as the court finds to be equitable, from the date of the dissenting shareholder's demand for payment under [subsection] 14A:11-2(3) * * * to the day of payment. If the court finds that the refusal of any dissenting shareholder to accept any offer of payment, made by the corporation under section 14A:11-6, was arbitrary, vexatious or otherwise not in good faith, no interest shall be allowed to him. 14A:11-10. COSTS AND EXPENSES OF ACTION The costs and expenses of bringing an action pursuant to section 14A:11-8 shall be determined by the court and shall be apportioned and assessed as the court may find equitable upon the parties or any of them. Such expenses shall include reasonable compensation for and reasonable expenses of the appraiser, if any, but shall exclude the fees and expenses of counsel for and experts employed by any party; but if the court finds that the offer of payment made by the corporation under section 14A:11-6 was not made in good faith, or if no such offer was made, the court in its discretion may award to any dissenting shareholder who is a party to the action reasonable fees and expenses of his counsel and of any experts employed by the dissenting shareholder. 14A:11-11. DISPOSITION OF SHARES ACQUIRED BY CORPORATION (1) The shares of a dissenting shareholder shall become reacquired by the corporation which issued them upon the payment of the fair value of shares. * * * CLASS A BASE TEN SYSTEMS, INC. CLASS A PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY FOR THE SPECIAL MEETING OF SHAREHOLDERS ON DECEMBER 31, 1997 The undersigned hereby constitutes and appoints MYLES M. KRANZLER and ALAN J. EISENBERG, and each of them, his or her true and lawful agents and proxies, with full power of substitution in each, to represent the undersigned and vote, as directed, all the shares of Class A Stock which the undersigned may be entitled to vote, at the Special Meeting of Shareholders of Base Ten Systems, Inc. to be held at the executive offices of the Company, at One Electronics Drive, Trenton, New Jersey 08619 on Wednesday, December 31, 1997, and at any adjournments or postponements thereof, on all matters coming before said meeting. YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICE BY MARKING THE APPROPRIATE BOXES, SEE REVERSE SIDE, BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS. YOUR SHARES CANNOT BE VOTED BY THE PERSONS NAMED ABOVE AS PROXIES UNLESS YOU SIGN AND RETURN THIS CARD. (continued, and to be signed on reverse side) SEE REVERSE SIDE PLEASE DATE, SIGN AND MAIL YOUR PROXY CARD BACK AS SOON AS POSSIBLE! SPECIAL MEETING OF SHAREHOLDERS BASE TEN SYSTEMS, INC. CLASS A DECEMBER 31, 1997 | Please Detach and Mail in the Envelope Provided | V V A /X/ Please mark your votes as in this example THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS VOTES "FOR" EACH OF THE FOLLOWING FOR AGAINST ABSTAIN PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN THIS PROXY CARD USING 1. Approval and adoption of the Asset / / / / / / THE ENCLOSED ENVELOPE. YOU MAY REVOKE THIS PROXY AT ANY TIME BY Purchase Agreement providing for FORWARDING TO THE COMPANY A SUBSEQUENTLY DATED PROXY RECEIVED BY the Sale. THE COMPANY PRIOR TO THE TAKING OF A VOTE ON THE MATTERS HEREIN. 2. Approval of the issuance of Class A / / / / / / Stock underlying Convertible Securities. 3. Approval of the Stock Option Plan / / / / / / Amendments. 4. OTHER MATTERS: Discretionary authority is hereby granted with respect to such other matters as may properly come before the meeting or any adjournment or postponement thereof. THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED AND, IF NO INSTRUCTIONS TO THE CONTRARY ARE INDICATED, WILL BE VOTED FOR APPROVAL OF THE PROPOSALS SET FORTH IN THE NOTICE OF SPECIAL MEETING OF SHAREHOLDERS. The undersigned hereby acknowledges receipt of the Notice of Special Meeting of Shareholders and the Proxy Statement furnished herewith and hereby revokes any proxy or proxies heretofore given. ____________________________________ DATE: _______________, 1997 ____________________________________ DATE: _______________, 1997 SIGNATURE (TITLE, IF ANY) SIGNATURE (TITLE, IF ANY) NOTE: Please print and sign your name exactly as it appears hereon. When signing as attorney, agent, executor, administrator, trustee, guardian or corporate officer, please give full title as such. Each joint owner should sign the Proxy. If a corporation, please sign full corporate name by president or authorized officer. If a partnership, please sign in partnership name by authorized person.
CLASS B BASE TEN SYSTEMS, INC. CLASS B PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY FOR THE SPECIAL MEETING OF SHAREHOLDERS ON DECEMBER 31, 1997 The undersigned hereby constitutes and appoints MYLES M. KRANZLER and ALAN J. EISENBERG, and each of them, his or her true and lawful agents and proxies, with full power of substitution in each, to represent the undersigned and vote, as directed, all the shares of Class B Stock which the undersigned may be entitled to vote, at the Special Meeting of Shareholders of Base Ten Systems, Inc. to be held at the executive offices of the Company, at One Electronics Drive, Trenton, New Jersey 08619 on Wednesday, December 31, 1997, and at any adjournments or postponements thereof, on all matters coming before said meeting. YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICE BY MARKING THE APPROPRIATE BOXES, SEE REVERSE SIDE, BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS. YOUR SHARES CANNOT BE VOTED BY THE PERSONS NAMED ABOVE AS PROXIES UNLESS YOU SIGN AND RETURN THIS CARD. (continued, and to be signed on reverse side) SEE REVERSE SIDE PLEASE DATE, SIGN AND MAIL YOUR PROXY CARD BACK AS SOON AS POSSIBLE! SPECIAL MEETING OF SHAREHOLDERS BASE TEN SYSTEMS, INC. CLASS B DECEMBER 31, 1997 | Please Detach and Mail in the Envelope Provided | V V A /X/ Please mark your votes as in this example THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS VOTES "FOR" EACH OF THE FOLLOWING FOR AGAINST ABSTAIN PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN THIS PROXY CARD USING 1. Approval and adoption of the Asset / / / / / / THE ENCLOSED ENVELOPE. YOU MAY REVOKE THIS PROXY AT ANY TIME BY Purchase Agreement providing for FORWARDING TO THE COMPANY A SUBSEQUENTLY DATED PROXY RECEIVED BY the Sale. THE COMPANY PRIOR TO THE TAKING OF A VOTE ON THE MATTERS HEREIN. 2. Approval of the issuance of Class B / / / / / / Stock underlying Convertible Securities. 3. Approval of the Stock Option Plan / / / / / / Amendments. 4. OTHER MATTERS: Discretionary authority is hereby granted with respect to such other matters as may properly come before the meeting or any adjournment or postponement thereof. THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED AND, IF NO INSTRUCTIONS TO THE CONTRARY ARE INDICATED, WILL BE VOTED FOR APPROVAL OF THE PROPOSALS SET FORTH IN THE NOTICE OF SPECIAL MEETING OF SHAREHOLDERS. The undersigned hereby acknowledges receipt of the Notice of Special Meeting of Shareholders and the Proxy Statement furnished herewith and hereby revokes any proxy or proxies heretofore given. ____________________________________ DATE: _______________, 1997 ____________________________________ DATE: _______________, 1997 SIGNATURE (TITLE, IF ANY) SIGNATURE (TITLE, IF ANY) NOTE: Please print and sign your name exactly as it appears hereon. When signing as attorney, agent, executor, administrator, trustee, guardian or corporate officer, please give full title as such. Each joint owner should sign the Proxy. If a corporation, please sign full corporate name by president or authorized officer. If a partnership, please sign in partnership name by authorized person.
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