-----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, RmfT66h9ZodEHkIaw/S7BVK1AEJOBaw0gwU37GugiRnSBTrQSWN0KabI5BEUA3BA Nr0hcQ2+B1Sif2ECeGoEeg== 0000927796-99-000104.txt : 19990430 0000927796-99-000104.hdr.sgml : 19990430 ACCESSION NUMBER: 0000927796-99-000104 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 DATE AS OF CHANGE: 19990429 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BASE TEN SYSTEMS INC CENTRAL INDEX KEY: 0000010242 STANDARD INDUSTRIAL CLASSIFICATION: 3812 IRS NUMBER: 221804206 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-07100 FILM NUMBER: 99595440 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 10-K 1 ANNUAL REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K --------- Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1998 Commission File No. 0-7100 - - ------------------------------------------- -------------------------- BASE TEN SYSTEMS, INC. ---------------------- (Exact name of registrant as specified in its charter) New Jersey 22-1804206 ---------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Electronics Drive Trenton, New Jersey 08619 ------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (609) 586-7010 Securities registered pursuant to Section 12(g) of the Act: Outstanding at Title of each class March 26, 1999 ------------------- -------------- Class A Common Stock 21,204,264 Class B Common Stock 71,144 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K under the Securities Exchange Act of 1934 is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated in Part III of this Form 10-K or any amendments to this Form 10-K (X). As of March 26, 1999, 21,204,264 shares of Class A Common Stock and 71,144 shares of Class B Common Stock were outstanding, and the aggregate market value of shares held by unaffiliated stockholders was approximately $15,457,000 and $163,000, respectively. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Proxy Statement for the 1999 Annual Meeting of Shareholders are incorporated by reference into Part III of this Report. ================================================================================ PART I Item 1. Business - - ----------------- *Forward Looking Statement The following contains forward-looking information within the meaning of The Private Securities Litigation Reform Act of 1995. Such forward looking statements and paragraphs may be identified by an "asterisk" ("*") or by such forward looking terminology as "may", "will", "believe", "anticipate", or similar words or variations thereof. Such forward looking statements involve certain risks and uncertainties including the particular factors described below in this Business discussion as well as throughout this annual report and in each case actual results may differ materially from such forward looking statements. Successful marketing of BASE10(TM)ME, BASE10(TM)CS and BASE10(TM)FS and their future contribution to Company revenues depends heavily on, among other things, successful early completion of current test efforts and the necessary corrections to the software permitting timely delivery to customers, none of which can be assured. Other important factors that the Company believes may cause actual results to differ materially from such forward looking statements are discussed in the "Risk Factors" sections in the Company's Registration Statement on Form S-3 (File No. 333-46095) as well as current and previous filings with the Securities and Exchange Commission. In assessing forward looking statements contained herein, readers are urged to read carefully those statements and other filings with the Securities and Exchange Commission. The Company does not undertake to publicly update or revise its forward looking statements even if experience or future changes make it clear that any projected results or events (expressed or implied) will not be realized. Overview - - -------- Base Ten Systems, Inc. (the "Company" or "Base Ten") was founded in 1966 and became publicly traded in 1968. Through its earlier history, the Company's focus was designing and producing products for defense and space programs ranging from airborne telemetry installed in the Apollo spacecraft to high performance weapons controllers used during operation Desert Storm through its Government Technology Division ("GTD"). As the "cold war" came to an end, management recognized that declines in U.S. and NATO spending required that Base Ten develop commercial lines of business. As an outgrowth of strategic planning work begun in 1990, management began looking at new business lines leveraging its experience in developing safety critical technology applications. With the promise of significant growth, the pharmaceutical and medical device markets emerged as likely targets of opportunity for the "new" Base Ten. Specifically, the development and marketing of software solutions for the manufacture of pharmaceuticals and medical devices addressed a totally unserved market niche. The Company established the Medical Technology Division ("MTD") to address the differing development, manufacturing, marketing, and sales needs of the commercial sector. Losses resulting from reduced revenues from the shrinking defense market coupled with considerable product development and marketing expense in the MTD produced increasing operating losses for Base Ten as a whole. In 1997, the decision was reached to sell the defense related business and focus exclusively on the opportunities offered in the medical technology market. On December 31, 1997, following shareholder approval, Base Ten completed the sale of the GTD to Strategic Technology Systems, Inc. ("Strategic"). On January 29, 1998 the Company elected to change its fiscal year to an accounting period January 1 through December 31. Since the establishment of the MTD, Base Ten has been designing, developing, and marketing comprehensive software solutions for regulated manufacturing industries, and most recently, computerized Manufacturing Execution Systems ("MES") for the pharmaceutical and medical device industries. Management focused on the MES markets, as it believes there is a strong potential for growth over the next few years. Factors contributing to this decision include the growing pressure on the Company's customer base to comply with regulations promulgated by the Food and Drug Administration ("FDA"), the International Standards Organization ("ISO 9000"), and other industry standards such as Good Automated Manufacturing Practices ("GAMP"). In addition, increasing competitive influences brought on by a) recent business combinations occurring in the customer market, and b) the rise in purchasing power among HMOs and other benefit programs, have underscored the need for manufacturers to be even more cost efficient.* Base Ten's products are used in safety critical applications requiring consistent, highly reliable outcomes where an out-of-specification event could have a catastrophic result. The Company developed a core competency in safety critical programs based on 20 plus years of experience designing electronic applications used primarily in weapons management systems for military aircraft. Base Ten has applied this expertise to the development of its MES products. The Company's premier product was PHARMASYSTTM. It was a computerized manufacturing execution system designed specifically for the pharmaceutical, medical device, biotechnology, and chemical industry. Based upon the technology used in PHARMASYSTTM, the Company developed the BASE10TMME product line (formerly known as PHARM2TM). In addition, the assets of the FlowStream product, a similar MES offering, were purchased from Consilium, Inc., in February 1998, and renamed BASE10TMFS (refer to Note D to the Consolidated Financial Statements). Lastly, the clinical supplies market, a subset of the pharmaceutical manufacturing segment, was identified as an attractive business opportunity. In September 1998, using software similar to BASE10TMME, the Company introduced BASE10TMCS. BASE10TMME operates on a PC-based system using distributed WindowsTM NT client-server architecture. BASE10TMFS uses a distributed HP-UX or Digital VAX/VMS client-server architecture, object-oriented design, application programming, and a relational database. They are both fully scalable and may be implemented in a single operation, department, or across an entire supply chain. The advantages of gradual integration are maximized user-level performance and the ability to adjust quickly to ever-changing demands. An intuitive user interface eases the task of data entry and retrieval with icons, selection boxes, and an intelligent form designer. In addition, Base Ten's MES products are not custom solutions or tool kits. They are designed and marketed as standard applications, for implementation into a customer's existing manufacturing facility. Both MES products act as electronic monitors, ensuring that the production process complies with a predefined set of specifications in order to produce a consistent product. Base Ten is engaged in a continuous program to maintain compliance with an industry generated standard for GAMP as a means of differentiating itself from present and future competition.* BASE10TMCS, a Clinical Supplies Materials Management System, is an analog of BASE10TMME. It was designed for pre-approval product testing and is based on a distributed Windows NT client-server platform for application within Phase II and III clinical trials. BASE10TMCS helps to ensure that a secure and steady flow of the trial product is available for distribution. The effective management of patient pack supply is critical for obtaining regulatory approval as well as for meeting or exceeding time to market goals. In an increasingly competitive global market, where the pressure to launch new drugs is mounting, the need for an automated material management system like BASE10TMCS is clear. It allows rapid fulfillment of requests, full support of traceability requirements, while maintaining full compliance with FDA procedures. Historical operations data is stored in a relational database which can be readily accessed to support a new drug application, real-time production analyses, and ultimately, timely scale-up to commercial production. * The Company believes that BASE10TMME, BASE10TMFS and BASE10(TM)CS address many of the unique challenges faced by these regulated industries. For a large number of companies, managing, controlling, and documenting the manufacturing process and pre-approved product testing process, in real-time, while reducing costs, and remaining in compliance have been difficult. Base Ten's products offer state-of-the-art software solutions that reduce paperwork, human error, and the time required to review, approve, and analyze batch records. More importantly, since customers and prospects have indicated that compliance with industry standards is imperative, efforts have been focused on ensuring that the products are also in compliance with the FDA current Good Manufacturing Practice ("cGMP"), ISO 9000, and GAMP*. To appreciate the advantages of Base Ten's products, it is important to understand the functions that a manufacturing execution system is designed to perform. MES are software programs designed to create uniformity in a production sequence by defining the elements of each production step. They essentially institute a checklist to be followed, defining the raw material inputs, equipment operating instructions, and procedures to be followed in order to maintain consistency in an end product. Historically, manufacturers have implemented MES using paper forms that follow a batch through the production sequence, requiring signatures to verify that defined procedures were followed. Paper-based systems are susceptible to human errors, leading to an increased possibility of corrupted batches. The production of certain products effecting health and safety, such as pharmaceuticals and consumer products, require greater production process control to decrease the possibility of a corrupted end product. To obtain greater control and increase efficiency, manufacturers have incorporated custom computer solutions into their MES. These solutions are expensive, time consuming to implement, address only limited procedures and generally do not possess the flexibility for expansion or the addition of new technologies. Base Ten believes there is a compelling and immediate need for the pharmaceutical and medical device industries to implement MES that are cost effective, are flexible, and facilitate the demonstration of compliance with FDA cGMP regulations. It is also believed that these industries are actively seeking suppliers and products to aid in compliance. Base Ten's manufacturing execution systems are designed to enable these companies to meet their needs in a way that is consistent with how they presently do business. The Company's MES products enable the customer to specify the individual steps of the production process. They interface with Manufacturing Resource Planning ("MRP") and Supervisory Control and Data Acquisition ("SCADA") systems, information databases and stand-alone production machinery such as scales, blenders and ovens, directing the execution of the production process and continuously monitoring the compliance of each step with the manufacturer's defined specifications. Should they recognize an out-of-specification event, they can adapt to the out-of-specification event by selecting a previously defined and approved alternative procedure in order to allow the process to continue in a compliant manner. If a remedial alternative is not available, the Base Ten products will not authorize commencement of the next production step and can issue a problem notification to supervisory or quality control personnel. In addition, BASE10(TM)ME, BASE10(TM)FS, and BASE10(TM)CS chronologically track and electronically record each input, procedure and output, which provides a significant tool for the customer to demonstrate ongoing cGMP compliance. * Base Ten's products provide a standard set of MES applications, and not a set of tools that the customer must learn to use in order to develop a solution. An intelligent MES software set was created that is both flexible and robust. Fully integrated modules, that are linked to a system's database, are the key to rapid implementation. Base Ten's standard MES products can be configured with the appropriate modules to meet a customer's specific requirements. Additionally, the features and functions required to support FDA cGMP are built into the standard base product. The Company believes that BASE10TMME, BASE10TMFS, and BASE10TMCS are applicable to the highly regulated pharmaceutical and medical device manufacturing industries. The production of pharmaceuticals is subject to FDA cGMP, which mandate compliance with technical requirements involving manufacturing production processes. During its inspections, the FDA frequently verifies whether a manufacturer is in compliance with cGMP. These software products, through Base Ten's program of meeting GAMP requirements, is intended to support the manufacturer's verification of a compliant production process in a manner which Base Ten believes is acceptable to the FDA. * Partnerships - - ------------ The Company has entered into collaborative relationships with industry recognized engineering firms and system integrators that can implement, and/or validate our products. The Company has established partnerships with Walsh Automation, a Canadian systems integrator; WTI Systems Ltd, an English systems integrator; Toyo Engineering Co., a Japanese developer of turnkey manufacturing facilities; KPMG LLP and Foster Wheeler, providers of services and integration to the pharmaceutical industry; Taisei Corporation, a construction and engineering company in Japan and Euriware, a European based integrator. In addition, Base Ten has established strategic and technology alliances that enhance its product portfolio and technology offerings. Some of the partnerships include, but are not limited to the following: Microsoft, a leading technology software provider; Intellution, a leading supplier of Supervisory Control and Data Acquisition/Batch Control and Execution software; and Documentum, a leading supplier of Document Management software. Additionally, the Company has partnered with Compaq, Novasoft, Beckman Coulter, and SAP to offer the Integrated Pharmaceutical Supply Chain Consortium utilizing the BusinessBus technology. This is a new solution set for complex pharmaceutical manufacturing environments based on industry standard message queuing technology. It provides for seamless integration of disparate enterprise and manufacturing applications without custom coding interfaces and without modifying original code. In addition, the Company has embarked on a certification effort with SAP to provide official recognition of the interfacing between the two software products.* These relationships have not yet produced significant revenues, however additional product development is necessary before the anticipated benefits are fully recognized. Base Ten believes that such relationships are necessary if the Company is to achieve its market potential. Through the announcement of these alliances, Base Ten has benefited by gaining increased exposure for its product line. Seminars, conducted jointly with partners, highlight the benefits and demonstrate the applicability and ease of use of its products. Other Products - - -------------- Ultrasound Imaging Products. Base Ten introduced uPACS(TM), a system for archiving ultrasound images, in 1994. The system digitizes records, and stores ultrasound images on CD-ROMs as an alternative to existing film and video storage systems. In April 1996, the Company determined that uPACS was not a commercially viable product in its current state of development, despite the fact that it expected to receive FDA clearance of a pre-market notification application ("510(k) clearance"), which was ultimately granted in 1996. The Company continued development efforts of uPACS(TM), and in May 1997 entered into an agreement whereby it became a minority owner of uPACS LLC, a limited liability company (the "LLC"). Under the terms of the agreement the Company made a capital contribution to the LLC of its rights to its uPACS(TM) technology. In exchange for such capital contribution, the Company received a 9% interest in the LLC. A then outside investor, who is currently a principal shareholder of the Company, made a total capital contribution of $3 million in return for a 91% interest in the LLC. See Note M to the Consolidated Financial Statements for further information on this arrangement. During the fourth quarter of 1998, the Company determined that it did not have the required resources to devote to both its core manufacturing execution software business and the uPACS(TM) business, and as a result, initiated a search for a potential buyer of the LLC and its technology. Government Technology Division - - ------------------------------ As discussed above in the "Overview", on December 31, 1997, following shareholder approval, the Company, completed the sale of the GTD to Strategic. Strategic was a newly formed corporation managed and partially owned by individuals who were, prior to the GTD Sale, members of the Company's senior management (the "Management Group"). Members of the Management Group were significantly involved in the business and development of the GTD while employed by the Company and left the Company's employ to join Strategic concurrently with the GTD Sale. Strategic acquired substantially all of the net operating assets of the GTD in exchange for certain consideration pursuant to the terms and conditions set forth in an Asset Purchase Agreement between the Company and Strategic dated October 27, 1997. Sales and Marketing - - ------------------- The Company offers a portfolio of software products and service solutions for use in the pharmaceutical, clinical supplies (a subset of pharmaceuticals), fine chemicals, and medical products industries. During 1998 Base Ten's sales and marketing efforts were focused on MES and clinical supplies materials management applications for the FDA-regulated industries. The Company currently markets its products through a direct sales force in North America and Europe. The sales staff is currently based, domestically at Base Ten's corporate headquarters in New Jersey, and in California, and abroad in England, Germany and Belgium. The Company's sales force conducts presentations and demonstrations to management and end users at the customer site as part of the direct sales effort. Base Ten supplements its direct sales efforts with a variety of marketing initiatives including public relations activities, telemarketing, advertising in industry periodicals, trade shows, industry symposiums and workshops, and user group conferences. In addition, the company's website, is actively being used as a sales and marketing tool. While it is a valuable communications conduit, it has also been useful in making initial company and product introductions. The website has also proven to be an effective and efficient way to run annotated product demos for potential customers.* Research and Development - - ------------------------ Base Ten's research and development efforts are currently directed at the continued evolution of its existing products and clinical supplies applications that will utilize ActiveX components and browser based client technologies. The future generation of Base Ten's software will feature a rich function set and support rapid user customizations, including connectivity with other systems. The Company believes that this path ensures its leadership in the market for world class cGMP manufacturing applications. * During fiscal 1996 and 1997 the Company capitalized $4.1 million and $3.4 million, respectively, of software development costs almost all of which was for development of PHARMASYSTTM and BASE10TMME, the Company's core MES software. In fiscal years 1996, 1997, and 1998, Base Ten expensed approximately $0.4 million, $0.1 million, and $2.0 million, respectively, in research and development expenditures. The development staff consists of approximately 34 development, project and quality engineers supported by test and administrative staff. Competition - - ----------- During 1998, the Company competed in the MES and Clinical Supplies software markets. Base Ten faces three major sources of competition: paper-based systems, commercial vendors of software products that develop one or more elements for pharmaceutical manufacturing, and in-house computer programs. The Company's competitors include POMS, ProPack GmbH, SAP AG, Elan Informatique, and Courbon. Several of the competitors offer products that are either toolkits, requiring significant customization, or that provide only specific pieces of MES applications, and/or that focus on other vertical markets. Base Ten believes that the majority of Enterprise Resource Planning ("ERP") vendors will choose to partner or acquire the MES-specific functionality in a Best-of-Breed manner rather than developing it in-house, although one has stated otherwise. In addition, the Company feels that it gains a competitive advantage by staying focused on the FDA-regulated vertical industries at a time when other players are branching out into different markets. Another source of competitive advantage comes from its continued development of functionality and support for the evolving Clinical Supplies business. * Base Ten believes that the internal Information System departments, responsible for supporting year 2000 ("Y2K") initiatives and ERP projects, provide a source of competition for product sales. In addition, the Company competes with system integrators and internal corporate MIS departments for the services business. Competition among providers of software for manufacturers is likely to increase for many reasons. A number of companies have announced plans to introduce component-based products rather than developing an application for a particular operating system. These applications are assembled from compatible or wrapped components and have to exist, operate, and integrate in a component run-time environment. Base Ten needs to support a standardized information infrastructure that would enable integration and interoperability to complementary software applications such as ERP Systems, Document Management Systems ("DMS"), and Laboratory Information Management Systems ("LIMS"). This effort will benefit our customers by reducing implementation complexity, time, and cost. Plant investments are being driven by enterprise needs, therefore, systems that simply automate existing production management activities are not compelling enough to clear the investment hurdle. To demonstrate its competitive advantage, Base Ten needs to excel at, and reduce, the cost of non-production activities. The Company's success depends upon its ability to compete effectively with commercial competitors. * Despite the Company's belief that it ranks ahead of the known competition in suitability for pharmaceutical manufacturing, there can be no assurance that it will compete successfully with new or existing competitors or that competitive pressures faced by Base Ten will not materially and adversely affect its business and financial results. * Proprietary Rights - - ------------------ While the Company has received certain patent protection for its Base Ten products, there can be no assurances that any additional patents will be issued, that the scope of any patent protection will be adequate, or that any current or future issued patents will be held valid if challenged. The Company believes that its products and technology do not infringe any existing proprietary rights of others. The Company regards its software as proprietary and attempts to protect it with copyrights, trademarks, trade secret law, and contractual arrangements. However, existing copyright laws offer only limited practical protection for software. Furthermore, the laws of some foreign countries do not protect proprietary rights to the same extent, as do the laws of the United States. There can be no assurance that the means of protecting its proprietary software will be adequate or that competitors will not independently develop technologies similar to that of the Company. Under certain circumstances, customers of Base Ten may be entitled to limited access of the BASE10TMME source code. Customer access to source code may increase the products' possibility of misappropriation or other misuses of Base Ten's software. Accordingly, it may be possible for unauthorized third parties to copy certain portions of Base Ten's software or to obtain and use information that the Company regards as proprietary. In addition, the Company has filed applications for a patent covering certain aspects of the safety critical technology. Regulation - - ---------- Base Ten's software products do not require pre-marketing FDA clearance or approval at this time although the Company anticipates that such approval may be required in the future. However, those products are intended to facilitate compliance by pharmaceutical manufacturers with FDA cGMP and are designed to be integrated into a manufacturer's production systems. A pharmaceutical manufacturer's systems, including any BASE10(TM)ME, BASE10TMFS, and BASE10(TM)CS application, must be capable of sufficiently documenting the production of each batch of product to be in compliance with cGMP. Further, the manufacturer must be able to demonstrate to the FDA that its systems have that capability under a variety of circumstances. Base Ten is engaged in a continuous program to maintain compliance with GAMP.* Other products Base Ten has developed are considered, and the archiving software for ultrasound images that the Company is supporting will be considered, "medical devices" under FDA regulations. Before such products may be marketed in the U.S., they must receive FDA clearance of a pre-market notification application ("510(k) clearance") or FDA clearance of a pre-market approval application ("PMA"). Obtaining such clearance can take substantial time and can require substantial expenditures. Many other countries regulate the manufacture, marketing and use of medical devices in ways similar to the U.S. There can be no assurance that Base Ten will be able to obtain required clearances for any products it develops on a timely or cost-effective basis, if at all.* Employees - - --------- The Company currently employs a total work force of 133 persons, including 43 engineers, plus additional contract labor. None of the Company's employees are covered by collective bargaining agreements. The Company has never experienced any labor disruptions or work stoppages and considers its employee relations to be good. Product Liability Insurance - - --------------------------- Base Ten maintains product liability insurance of at least $5 million for its products in the event a claim is made that the Company's products failed to prevent defects in pharmaceutical products which resulted in injury to consumers. There can be no assurances that the Company's existing insurance would be adequate to cover any claims or that the Company will be able to obtain and maintain adequate insurance in the future. The Company and Strategic have agreed to each obtain insurance protecting the other from liabilities that could occur because of defense products now in the field manufactured by the GTD while part of the Company. Foreign Operations - - ------------------ Information on operations in different geographic areas is provided in Note J to the Consolidated Financial Statements. Executive Officers of the Company - - --------------------------------- The current executive officers of the Company are as follows:
Name Age Offices Held with Base Ten Period Served - - ---- --- -------------------------- ------------- Thomas E. Gardner 51 Chairman of the Board, President and 1997 to present Chief Executive Officer Alexander M. Adelson 64 Vice Chairman of the Board 1998 to present C. Richard Bagshaw 59 Executive Vice President 1997 to present William F. Hackett 48 Senior Vice President, CFO and Secretary 1997 to present Harvey I. Cohen 47 Senior Vice President and 1998 to present Chief Technology Officer Stephen A. Cloughley 38 Senior Vice President 1998 to present
A summary of the business experience and background of the Company's officers is set forth below. Mr. Gardner has been President and Chief Executive Officer since November 1, 1997, a Director since December 31, 1997 and Co-Chairman of the Board from December 31, 1997 to April 1998. In April 1998, Mr. Gardner was appointed Chairman of the Board. Mr. Adelson has been a Director since 1992. He served as Vice Chairman from 1997 until December 31, 1997, Co-Chairman of the Board from December 31, 1997 to April 1998 and since April 1998, serves as Vice Chairman. From 1992 to 1998 Mr. Adelson also provided investment and financial advisory services to the Company. Mr. Bagshaw was President and General Manager of Syntex PR of Humacao, Puerto Rico, a subsidiary of Syntex Pharmaceuticals, Palo Alto, California subsequently acquired by Roche Holdings in 1995. From 1991 to 1996 he was responsible for strategy development and implementation for corporate partnering and talent upgrade. Mr. Hackett was a Senior Manager for the Princeton Data Division of Bloomberg Financial Markets from 1991 to 1997 responsible for the collection, analysis, and distribution of information and product development. Mr. Cohen joined Base Ten in 1980, as senior software engineer developing alarm reporting and missile control systems. In 1993, Mr. Cohen became actively involved in Base Ten's move to the industrial systems market and he was one of the original developers of the company's MES concepts. Mr. Cohen is currently a Senior Vice President of New Product Development and Chief Technology Officer. Mr. Cloughley joined the Company in February 1994 as head of sales for Europe. In 1996, he transferred to the corporate offices in Trenton to head the marketing department. More recently, he has become Senior Vice President, in charge of Corporate Strategy & Marketing. Item 2. Properties - - ------------------- The Company's principal office in the United States is in Trenton, New Jersey. Base Ten leases an 82,000 square foot facility, which houses its corporate headquarters and development and support activities. The lease for the building expires in October 2009. Base Ten occupies approximately 42,000 square feet of this property. Strategic occupies the remaining approximate 40,000 square feet, pursuant to a five-year sublease with the Company. Base Ten also leases approximately 3,000 square feet of space in Camberley, England for use as administrative offices and software development facilities. The lease for the office space in the Camberley facility expires in March 2003. In addition, the Company leases office facilities in California, Brussels, and Munich. Base Ten's facility in New Jersey was subject to a sale and leaseback transaction completed in October 1994. The Company's fifteen year lease on the facility includes a limited repurchase option exercisable at $4.3 million through October 1999, $3.9 million from October 1999 through October 2004, and then declining to $3.5 million during the last five years of the lease. See Note K to the Consolidated Financial Statements. Management believes that the Company's facilities are currently adequate for its operations. Item 3. Legal Proceedings - - -------------------------- The Company is involved from time to time in various claims and proceedings including employee claims in the normal course of business none of which, individually or in the aggregate, in the opinion of management, would have a material adverse effect on the consolidated financial position and results of operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders - - ------------------------------------------------------------ On November 10, 1998, the Company held a Special Meeting of Shareholders. At the meeting, the following were approved by the shareholders: (1) an amendment to the Certificate of Incorporation to increase the authorized Class A Common Stock from 40 million to 60 million shares, (2) the sale and issuance of Series B Redeemable Convertible Preferred Stock (subject to the execution of definitive agreements), (3) the issuance of Class A Common Stock Purchase Warrants to the Series A Redeemable Convertible Preferred Stockholders that would receive Series B Redeemable Convertible Preferred Stock, (4) the modification of the outstanding $10 million 9.01% Convertible Subordinated Debenture, (5) the sale and issuance of up to 6,666,666 shares of Class A Common Stock at a purchase price of $3.00 per share, and Warrants to purchase up to 1,000,000 shares of Class A Common Stock, (6) the amendment to the 1998 Directors' Stock Option Plan, and (7) the amendment to the 1998 Stock Option and Stock Award Plan. The sale and issuance of Series B Redeemable Convertible Preferred Stock ("Series B Preferred Shares") was issued to the Series A Redeemable Convertible Preferred Stockholders in the form of an even exchange for Series A Redeemable Convertible Preferred Stock ("Series A Preferred Shares") on March 5, 1999. The terms of the Series B Preferred Shares are similar to the Series A Preferred Shares, except that: (a) the Series B Preferred Shares have a conversion price of $4.00, whereas the conversion price of the Series A Preferred Shares was equal to the lesser of (i) $16.25 or (ii) the Weighted Average Price (as defined) of the Class A Common Stock prior to the conversion date; and (b) the Series B Preferred Shares, as a result of the conversion price of $4.00, will not provide the holder with the option to receive a subordinated 8% promissory note, as the Series A Preferred Shares provide. See Note N to the Consolidated Financial Statements. The issuance of Class A Common Stock Purchase Warrants to the Series A Preferred Stockholders that received Series B Preferred Stock provide for the issuance of 80,000 Class A Common Stock Purchase Warrants for each $1 million of principal amount of the Series A Preferred Shares outstanding on November 10, 1998 in addition to certain other Series A Preferred Shares which were converted at $4.00 per share between September 1, 1998 and November 10, 1998 on the date of exchange. These purchase warrants are four-year warrants exercisable at $3.00, and provide for mandatory exercise upon the occurrence of certain events. The modification of the $10 million 9.01% Convertible Subordinated Debenture authorized a decrease in the conversion price from $12.50 to $4.00 upon conversion of the outstanding debenture. In November 1998, the Company sold 6,666,666 shares of Class A Common Stock at a purchase price of $3.00 per share for aggregate proceeds of $20,000,000. For each $1 million of Class A Common Stock purchased, the purchaser received seven-year warrants to purchase 50,000 shares of Class A Common Stock, exercisable at $3.00 per share; a total of 1,000,000 warrants were, therefore, issued to the purchaser. The placement agent also received warrants to purchase up to $250,000 shares of Class A Common Stock. PART II Item 5. Market for the Company's Common Stock and Related Shareholder Matters - - ------------------------------------------------------------------------------ The Company's Class A Common Stock is listed on the NASDAQ National Market System under the trading symbol BASEA. The Company's Class B Common Stock, which traded under the symbol BASEB, was de-listed from the NASDAQ SmallCap Market over the counter market in the second quarter of 1998. See Note O to the Consolidated Financial Statements. The following table sets forth the high and low sale prices of the Company's Class A Common Stock and Class B Common Stock as reported by NASDAQ for the periods indicated:
Class A Common Stock Class B Common Stock Bid Price Bid Price --------- --------- High Low High Low ---- --- ---- --- Fiscal 1997: - - ------------ First quarter.................. $ 12 1/4 $ 10 $ 14 3/4 $ 12 Second quarter................. 11 1/2 9 3/4 14 3/4 12 3/4 Third quarter.................. 10 7/8 9 7/8 14 1/4 11 1/2 Fourth quarter................. 16 9 3/4 16 10 1/2 November - December 1997....... $ 14 1/8 $ 9 5/8 $ 13 $ 11 - - ------------------------ Fiscal 1998: - - ------------ First quarter.................. $ 10 1/2 $ 5 $ 10 1/2 $ 7 Second quarter................. 6 5/8 2 1/16 7 7/8 7 1/8 Third quarter.................. 5 3/16 1 9/16 N/A N/A Fourth quarter................. 4 1 15/16 N/A N/A
As of March 26, 1999, there were approximately 715 record holders of Class A Common Stock and 119 record holders of Class B Common Stock. Base Ten has not paid cash dividends on its Common Stock since 1985. The present policy of the Board of Directors is to retain any future earnings to provide for the Company's growth. Item 6. Selected Financial Data - - ------------------------------- The following table presents selected financial data for Base Ten and its consolidated subsidiaries. The financial data for the fiscal years ended December 31, 1998, October 31, 1997 and 1996 and the two month period ended December 31, 1997 have been derived from the Company's audited Consolidated Financial Statements included elsewhere in this Report and should be read in conjunction with those Consolidated Financial Statements and related Notes.
Base Ten Systems, Inc. and Subsidiaries (dollars in thousands except per share data) Two-Months Year Ended Ended Year Ended Year Ended Year Ended Year Ended Dec 31, Dec 31, Oct 31, Oct 31, Oct 31, Oct 31, 1998 1997 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- Summary of Operations: Revenues $ 7,550 $ 181 $ 2,512 $ 1,262 $ 2,710 $ 584 Loss from continuing operations before income tax benefit(1) $ (19,020) $ (3,714) $ (15,980) $ (9,097) $ (2,616) $ (125) (2) Income taxes (benefit) $ -- $ -- $ -- $ (684) $ (707) $ 24 Net loss from continuing operations $ (19,020) $ (3,714) $ (15,980) $ (8,413) $ (1,909) $ (149) Net earnings (loss) from $ -- $ (222) $ (6,027) $ (546) $ 532 $ 184 discontinued operations Net earnings (loss) $ (19,020) $ (3,936) $ (22,007) $ (8,959) $ (1,377) $ 35 ---------- ---------- ---------- ---------- ---------- ---------- Net (loss) per common share continuing operations $ (2.09) $ (.45) $ (2.03) $ (1.09) $ (.28) $ (.02) Discontinued operations $ -- $ (.03) $ ( .76) $ (.07) $ .08 $ .05 ---------- ---------- ---------- ---------- ---------- ---------- Net earnings (loss) per share $ (2.09) $ (.48) $ (2.79) $ (1.16) $ (.20) $ .03 ---------- ---------- ---------- ---------- ---------- ---------- Summary Balance Sheet As of : Dec 31, Dec 31, Oct 31, Oct 31, Oct 31, Oct 31, 1998 1997 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- Working capital (3) $ 15,482 $ 6,080 $ 2,671 $ 14,115 $ 13,270 $ 5,860 Total assets $ 33,821 $ 24,413 $ 21,217 $ 30,397 $ 28,005 $ 17,609 Long term debt, net of current $ 13,341 $ 18,916 $ 18,925 $ 13,478 $ 3,525 $ 3,601 maturities (4) Redeemable Preferred Stock $ 12,914 $ 6,155 -- -- -- -- Shareholders' equity (deficiency) $ 2,372 $ (6,054) $ (4,982) $ 12,140 $ 20,261 $ 9,431
(1) Included in 1996 financial data is a write-off of capitalized software cost of $2.4 million. (2) Included in fiscal year October 31, 1997 financial data is $2.7 million of expense relating to the fair market value of options and warrants issued to non-employee consultants (see discussion in Results of Operations - Continuing Operations). (3) Included in fiscal 1997 is the reclassification of the assets and liabilities of GTD as net assets held for sale. (4) Included in 1994 to 1998 financial information is a long-term financing obligation. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - - -------------------------------------------------------------------------------- General - - ------- As discussed in Part 1, Item 1, on December 31, 1997, following approval by shareholders, the Company sold the GTD (the "GTD Sale") to Strategic Technology Systems, Inc. ("Strategic). On January 29, 1998, the Company elected to change its fiscal year to an accounting period from January 1 through December 31. This Annual Report on Form 10-K, for the fiscal year ended December 31, 1998, does not include, except as indicated herein, the operations of the GTD. Strategic was a newly formed corporation managed and partially owned by individuals who were, prior to the GTD Sale, members of the Company's senior management (the "Management Group"). Members of the Management Group were significantly involved in the business and development of the GTD while employed by the Company and left the Company's employ to join Strategic concurrently with the GTD Sale. Strategic acquired substantially all of the operating assets of the GTD in exchange for certain consideration and the assumption of certain liabilities, pursuant to the terms and conditions set forth in an Asset Purchase Agreement between the Company and Strategic dated October 27, 1997. In February 1998, the Company purchased certain assets from Consilium, Inc. Refer to Note D to the Consolidated Financial Statements and the "Continuing Operations Overview" below for more information about this acquisition. The Company's initial MES product was PHARMASYST(TM), which was introduced in 1993. Utilizing the PHARMASYST(TM) technology, the Company developed and released the BASE10(TM)ME product line. In June 1998, Base Ten released BASE10(TM)ME version 2.3. The Company followed in September 1998 with the release of BASE10(TM)CS, which is an analog of BASE10(TM)ME, designed for pre-approval product testing. Cost Reduction Measures - - ----------------------- As a result of the purchase of the FlowStream product line in February 1998, the Company experienced an increase in headcount of approximately 32 employees bringing the total headcount for Base Ten to approximately 165 employees as of the acquisition date. Base Ten also experienced a slight ramp up during the first and second quarters of 1998 in headcount, independent of the FlowStream product line acquisition, primarily in the areas of development, sales and marketing and administration. During the second quarter of 1998, the Company initiated cost reduction measures. Costs were primarily reduced by downsizing the Company's workforce by approximately 20%. Discontinued Operations - - ----------------------- As discussed in Part 1, Item 1, the consolidated financial statements of the Company have been restated in order to account for the operations of the GTD as discontinued operations in view of the GTD Sale. In the restatement, all assets and liabilities of the GTD at October 31, 1997 and December 31, 1997 and all items of income and expense attributable to GTD's operations for all periods presented have been eliminated from consolidation and accounted for on a net basis as assets held for sale and discontinued operations. Accordingly, the following discussion of the Company's financial condition and the results of operations excludes the results of the discontinued operations, except as otherwise indicated. Continuing Operations Overview - - ------------------------------ Since 1991, Base Ten, through its then existing Medical Technology Division has been engaged in the design, development, and marketing of comprehensive software solutions for the regulated manufacturing industries, and most recently, computerized manufacturing execution systems for the pharmaceutical and medical device industries. Management believes that the demand for MES in these markets is poised for significant growth over the next few years due to several factors. For one, there is growing pressure on the Company's customer base to comply with regulations promulgated by the FDA, ISO 9000, and other industry standards such as GAMP. In addition, increasing competitive influences brought on by a) recent business combinations occurring in the customer market, and b) the rise in purchasing power among HMOs and other benefit programs, have underscored the need for manufacturers to be even more cost efficient.* The Company's acquisition of certain assets from Consilium, Inc. in February 1998 broadened the Company's reach into these industries with the addition of the FlowStream product ("BASE10(TM)FS"); a UNIX-based MES targeted at pharmaceutical, medical device and specialty chemical customers. The Company believes that its products are premier, standardized PC-based systems running on Microsoft Windows-NT (BASE10(TM)ME and BASE10(TM)CS) and HP-UX or Digital VAX/VMS (BASE10(TM)FS) with requisite functionality and documented support required by the pharmaceutical and medical device industries to assist in reducing costs while remaining FDA, ISO 9000, and GAMP compliant. The Company will continue to pursue a leadership position in this market. * The Company has received indications from customers and prospects that compliance with industry standards is imperative to sales. As such, efforts have been focused on compliance with certain industry standards and the Company believes that both BASE10(TM)ME and BASE10(TM)FS are compliant with FDA, ISO 9000, and GAMP. As described above, there is a need for pharmaceutical and medical device manufacturers to have MES products compliant with cGMP. Further, the Company considers the additional costs of compliance with ISO 9000 and GAMP to be prudent investments.* Personnel are in place to address product development and enhancement, sales and marketing, and customer support. Management believes absorbing these expenses in advance of revenue generation is essential to facilitating market emergence and near term growth of the Company. * For use in a manufacturing environment, a system generally has to undergo validation in accordance with defined procedures determining its fitness for use in a regulated environment. The Company currently has two PHARMASYST(TM) systems installed and validated, one at a medical device manufacturing plant and the other at a pharmaceutical manufacturing plant. There are 14 validated BASE10(TM)FS installations at various customer sites. One additional PHARMASYST(TM) product and four BASE10(TM)ME products are believed to have completed customer testing necessary for validation. Software development expenditures are expensed as research and development until a product attains technological feasibility. At December 31, 1998 PHARMASYST(TM) and its successor, BASE10(TM)ME had a capitalized value of $2.9 million after allowing for amortization. Development expenditures for PHARMASYST(TM), BASE10(TM)ME and other commercial products have consisted primarily of salaries of software engineers and quality assurance staff plus applicable allocated overhead. Results of Discontinued Operations - - ---------------------------------- As discussed above, the GTD was sold on December 31, 1997, and as such its results of operations are not included in the Company's results of operations for fiscal year 1998. During 1997, the GTD was engaged primarily in the development of the Interference Blanking Unit based on a contract awarded to the GTD in May 1996. In addition, the GTD completed the development of the Maintenance Data Recorder development contract awarded in April 1996 and continued the development of the electronics for the SLAM-ER missile project which the GTD was awarded in late 1996. Fiscal 1998 Compared to Fiscal 1997 - - ----------------------------------- Continuing Operations --------------------- Revenues -------- Company revenues increased to $7.6 million in 1998 from $2.5 million in 1997. The increase is due to an increase in license and related revenues of $1.5 million, and service and maintenance revenues of $3.5 million. Revenues for 1998 were derived 36% from licenses and related revenues, and 64% from service and related revenues, as compared to 1997 when revenue was derived 49% from licenses and related revenues and 51% from service and related revenues. Revenues from FlowStream licenses, services and maintenance during 1998 accounted for $2.7 million of the $5.1 million increase in 1998. Cost of Revenues ---------------- Cost of revenues in 1998 was $9.6 million compared with $6.4 million in 1997. Cost of revenues increased as a result of increased sales of the Company's MES products and increased labor charges associated with the Company's increased service and maintenance related revenues. These increased costs were partly offset by decreased amortization of software development costs for PHARMASYST(TM) and BASE10(TM)ME of $2.6 million in 1998 from $3.0 million in 1997. Research and Development Costs ------------------------------ Research and development costs increased significantly in 1998 to $2.0 million from $0.1 million in 1997. This increase relates to additional personnel and related expenses being dedicated to developing future versions of the Company's products. Sales and Marketing Expenses ---------------------------- The Company's sales and marketing expenses increased significantly in 1998 to $5.0 million compared with $2.7 million in 1997. The rise was mainly attributable to salaries and related expenses resulting from the hiring of additional personnel and increased sales commissions which resulted from increased revenues. General and Administrative Expenses ----------------------------------- Company general and administrative expenses increased to $8.9 million in 1998 from $7.7 million in 1997. Costs rose primarily as a result of increases in administrative salary and related expenses, legal, professional and consulting fees and integration costs related to the addition of the FlowStream product line. These increases were partly offset by a decrease of $2.4 million expense related to the fair market value of options and warrants issued to non-employee consultants for services rendered during 1997. The fair market value in each year was determined using the Black-Scholes option pricing model. Other Income and Expense ------------------------ Other expense decreased from $1.5 million in 1997 to $1.0 million in 1998. In 1998, other expense is primarily comprised of interest expense of $1.6 million, partially offset by $0.5 million of interest income and $0.1 million of other income. In the 1997 period, other expense was comprised of $1.6 million of interest expense, partially offset by $0.1 million of interest income. Interest expense remained consistent in the 1998 period as a result of similar average levels of debt. Interest income increased in the 1998 period as a result of higher cash balances available to earn interest. Other income increased in the 1998 period largely due to rental income earned on the sublease of building space to Strategic, which was not present in the 1997 period, partially offset by foreign currency exchange losses. Continuing Losses ----------------- The Company incurred a net loss from continuing operations of $19.0 million in 1998 compared to a $16.0 million net loss from continuing operations in 1997. The increased loss in 1998 was largely attributable to increases in: headcount and related expenses, legal, professional and consulting fees and integration costs related to the addition of the FlowStream product. These increases were partly offset by a decrease of $2.4 million expense related to the fair market value of options and warrants issued to non-employee consultants for services rendered during 1997. The Company expects losses in 1999. The Company's ability to achieve profitable operations is dependent upon, among other things, the completion of current development and testing activities for BASE10(TM)ME and BASE10(TM)CS, timely delivery and successful installation and validation of its systems by its customers, and successful competition in the markets in which the Company participates. * Readiness for the Year 2000 - - --------------------------- Year 2000 Issues ---------------- Generally, in today's business environment, some computers, software, and other equipment include programming code in which calendar year data is abbreviated to only two digits. As a result of this design decision, some of these systems could fail to operate or fail to produce correct results if "00" is interpreted to mean 1900, rather than 2000. This problem (the "Y2K Problem") is widely expected to increase in frequency and severity as the year 2000 ("Y2K") approaches. The Company, in anticipating Y2K, has kept the potential for this problem in mind when purchasing new computers, software and equipment during the past year. The Company has also considered this problem when developing new products for sale to customers. Company Readiness. The Y2K Problem could affect computers, software, and other equipment used, operated, or maintained by the Company. Accordingly, during the second quarter of 1998, the Company formed an internal Y2K committee whose goal is to minimize any disruptions of the Company's business and to limit the Company's liabilities resulting from the Y2K Problem. As a result, the Company has reviewed its internal computer programs and systems, as well as the software that the Company develops and sells to customers, to determine if the programs and systems will be Y2K compliant. Information Technology Systems. During the first quarter of 1998, the Company, in anticipation of the year 2000, replaced its existing financial accounting software system, which the Company deems to be a business-critical system, with a system which is vendor-certified Y2K compliant. The Company believes that it has identified substantially all of the major computers, software applications, and related equipment used in connection with its internal operations that must be replaced or upgraded to minimize the possibility of a material disruption to its business. The Company presently believes that computer systems which are not currently Y2K-compliant will be replaced or upgraded in the normal replacement cycle prior to 2000. Systems Other than Information Technology Systems. In addition to computers and related systems, the operation of office and facilities equipment, such as fax machines, photocopiers, telephone switches, security systems, and other common devices may be affected by the Y2K problem. The Company is currently assessing the potential effect of, and costs of remediating, the Y2K Problem on its office and facilities equipment, however, it currently believes that the risk of business interruption due to this equipment is minimal. Software Sold to Customers. The Company believes that it has substantially identified and resolved all potential Y2K Problems with its latest MES software release, version 2.3 of BASE10(TM)ME, as well as with version 3.4 and later versions of BASE10(TM)FS. However, management also believes that it is not possible to determine with complete certainty that all Y2K Problems affecting the Company's software products have been identified or corrected due to complexity of these products and the fact that these products interact with other third party vendor products and operate on computer systems which are not under the Company's control. Certain customers have earlier versions of the Company's MES software, PHARM2(TM) (prior to version 2.3) and PHARMASYST(TM) which have not yet been tested by the Company for Y2K compliance. All of the customers that have purchased these earlier versions have had substantial customization done, which dictates that Y2K testing and modifications must be done on a case by case basis. These customers have been notified of the Company's willingness and ability to provide Y2K test specifications and/or manpower to help bring their version of the Company's software into Y2K compliance. It is a small number of customers that still operate with these earlier versions, and the Company believes that it can bring these earlier versions of the Company's software product into Y2K compliance without any material financial or human resources. Also, some customers have earlier versions of BASE10(TM)FS (prior to version 3.4) which have not been tested for Y2K compliance. However, the Company has a standard upgrade path in place for bringing all of these earlier versions into Y2K compliance. The upgrade has been made available and customers are currently planning the timing of when they will perform the upgrade. The Company believes that this upgrade can be provided with minimal use of financial and human resources, due to the standardized nature of this upgrade path. Costs of Compliance. The Company currently believes that its computer systems will be Y2K compliant in a timely manner, and estimates the total costs to the Company of completing any required replacements or upgrades of these internal systems will not have a material adverse effect on the Company's business or results of operations, although no assurances can be given. Costs to be incurred are expected to be immaterial and are currently estimated at less than $100,000. Third Party Suppliers. The Company has initiated communications with third party suppliers of the major computers, software, and other equipment used, operated, or maintained by the Company to identify and, to the extent possible, to resolve issues involving the Y2K Problem. While the majority of the Company's significant suppliers are software industry leaders and have committed to upgrades to resolve any Y2K Problems, the Company has limited or no control over the actions of these third party suppliers. Thus, while the Company expects that it will be able to resolve any significant Y2K Problems with these systems, there can be no assurance that these suppliers will resolve any or all Y2K Problems with these systems before the occurrence of a material disruption to the business of the Company or any of its customers. Any failure of these third parties to resolve Y2K Problems with their systems in a timely manner could, but is not currently expected to, have a material adverse effect on the Company's business, financial condition, and results of operations. Most Likely Consequences of Year 2000 Problems. The Company expects to identify and resolve all Y2K Problems that could have a material adverse effect on its business operations prior to the year 2000. However, management believes that it is not possible to determine with complete certainty that all Y2K Problems affecting the Company will be identified or corrected. It is not possible to accurately predict how many Y2K Problem-related failures will occur or the severity, duration, or financial consequences of these perhaps inevitable failures. As a result, management expects that the Company, under a worst-case scenario, could suffer the following consequences: (a) a significant number of operational inconveniences and inefficiencies for the Company and its clients that may divert management's time and attention and financial and human resources from its ordinary business activities; and (b) a small number of serious system failures related to older versions of the Company's PHARMASYST(TM) and PHARM2(TM) products that may require significant efforts by the Company and/or its customers to prevent or alleviate material business disruptions. Contingency Plans. The Company is currently developing contingency plans to be implemented as part of its effort to identify and correct Y2K Problems that may affect its internal systems, software and third party suppliers. The Company currently expects to complete its contingency plans during mid-1999. Depending on the systems affected, these plans could include accelerated replacement of affected third party equipment or software (the timing of which would occur in the third quarter of 1999), the hiring of additional personnel and/or increased work hours for Company personnel to correct, on an accelerated schedule, any Y2K Problems that arise with the earlier versions of PHARMASYST(TM) and PHARM2(TM) software sold to customers, and/or similar approaches to any Y2K Problems that may occur. If the Company is required to implement any of these contingency plans, it could, but is not currently expected to, have a material adverse effect on the Company's financial condition and results of operations. Based on the Company's current analysis of the Y2K Problem, as described above, the Company does not believe that the Y2K Problem will have a material adverse effect on the Company's business or results of operations. Disclaimer. The discussion of the Company's efforts, and management's expectations, relating to Y2K compliance are forward-looking statements. The Company's ability to achieve Y2K compliance and the level of incremental costs associated therewith, could be adversely impacted by, among other things, the resources needed to bring older versions of the Company's PHARMASYST(TM) and PHARM2(TM) software into Y2K compliance, the third-party supplier's ability to modify its proprietary software, and unanticipated problems identified in the ongoing compliance review. Fiscal 1997 Compared to Fiscal 1996 - - ----------------------------------- Continuing Operations --------------------- Revenues -------- Company revenues in 1997 increased to $2.5 million compared with $1.3 million in 1996 due to increases in deliveries of the then PHARM2(TM)product. Cost of Revenues ---------------- Cost of revenues in 1997 was $6.4 million compared with $4.4 million in 1996. Cost of revenues increased due to labor and overhead component cost of inventory increases primarily due to additional software development and test personnel in both the New Jersey and United Kingdom facilities. Amortization of software development costs for PHARMASYST(TM) and BASE10(TM)ME increased from $1.3 million in 1996 to $3.0 million in 1997. Also, in 1996, the Company wrote off a $2.4 million balance of capitalized costs related to its non-MES products, PRENVAL and uPACS, upon concluding that sufficient revenues and cash flows would not be generated to recover the capitalized costs for either product. Research and Development Costs ------------------------------ Research and development costs decreased from $0.4 million in 1996 to $0.1 million in 1997, as most resources were utilized for completion and maintenance of current versions of the Company's software during 1997. Sales and Marketing Expenses ---------------------------- Sales and marketing costs increased from $2.0 million in 1996 to $2.7 million in 1997 due partially to an increase of $0.3 million in consulting fees and increases in sales commissions and personnel costs. General and Administrative Expenses ----------------------------------- General and administrative expenses in 1997 were $7.7 million compared with $3.1 million in 1996. There were increases in almost all general and administrative expense categories, the largest of which was inclusion of a non-cash expense of $2.7 million which represents the fair market value of options and warrants issued to non-employee consultants for service rendered during fiscal 1997. The fair market value was determined using the Black-Scholes option pricing model. Other Income and Expense ------------------------ Other expense in 1997 was $1.5 million compared to $0.4 million in 1996, and was comprised of interest expense of $1.6 million and $0.7 million, respectively, offset partially by interest and other income of $0.1 million and $0.3 million, respectively. The increase in interest expense was related to interest on the $10 million convertible debenture issued in 1996 and the $5.5 million convertible debenture issued in 1997. The $10 million convertible debenture, which had an annual interest rate of 9.01%, was outstanding for less than three months in 1996 compared with a full year in 1997. The $5.5 million convertible debenture, issued in 1997 with an annual interest rate of 8%, was outstanding for five months in 1997. Continuing Losses ----------------- The Company incurred a loss from continuing operations before taxes of $16.0 million in 1997 compared to $9.1 million in 1996. The 1996 loss was reduced to $8.4 million by an income tax benefit of $.7 million. A major portion of the loss in 1997 compared to 1996 was attributable to the $1.7 million increased amortization, as well as certain cost overruns and related penalties of $1.0 million, and the $2.7 million expense related to the fair market value of options and warrants issued to non-employee consultants for services rendered during 1997. The increases in labor and overhead costs and interest expense also contributed to the loss. The 1996 loss included a write off of various capitalized expenses in the sum of $2.4 million representing development of the Company's prenatal abnormality detection software, PRENVAL, and early development costs of uPACS as well as other operating losses including interest and amortization of $ 2.0 million. The major portion of the operating loss represented the Company's continuing investment in the development of markets and infrastructure for the MES business. Discontinued Operations ----------------------- The GTD incurred a net loss of $6.0 million in 1997 compared to a net loss of $0.5 million in 1996. The GTD loss in 1997 consisted primarily of operating losses incurred because of reduced revenues without the corresponding reduction in operating expenses, and, a loss of $1.2 million on the GTD Sale. GTD revenues in 1997 were $10.0 million compared with $13.3 million in 1996. The decrease in revenues was directly attributable to the difficulty in obtaining new business due to delays in government procurement and stretched out deliveries of existing programs. The GTD cost of sales in 1997 was $9.3 million compared with $10.3 million in 1996. Selling, general and administrative expenses for 1997 were $4.1 million compared with $3.4 million in 1996. Liquidity and Capital Resources - - ------------------------------- Company working capital increased to $15.5 million at fiscal year end December 31, 1998 from $6.1 million at December 31, 1997. The Company had $17.4 million of cash and cash equivalents at December 31, 1998, up from $9.1 million at December 31, 1997. The increase in cash during the fiscal year ended December 31, 1998 resulted from the realization of capital provided from financing activities of $28.9 million, partially offset by the use of cash in operations of $17.1 million, the use of cash in investing activities of $3.4 million. In 1998 cash used in operations has been affected primarily by the net loss of $19.0 million, an increase of $0.8 million in accounts receivable and a reduction of $0.8 million in accounts payable and accrued expenses. These uses of cash have been partially offset by amortization and depreciation of $3.3 million and non-cash compensation expense resulting from issuance of stock options and warrants of $0.3 million, included in the aforementioned net loss amount. Investing activities in 1998 have been comprised primarily of the acquisition of assets related to the FlowStream product of approximately $2.1 million, additions to plant and equipment of $0.6 million and additions to capitalized software of $0.7 million. Cash from financing activities for 1998 resulted primarily from two transactions: (i) the net receipt in January 1998 of $9.4 million related to the second installment of an investment by the Company's Series A Redeemable Convertible Preferred Stockholders which had been finalized in December 1997, and (ii) the November 13, 1998 sale and issuance of 6,666,666 shares of Class A Common Stock for net proceeds of $18.8 million. Refer to Note N to the Consolidated Financial Statements for further discussion of these transactions. The Company's financial statements have been prepared on the basis that it will continue as a going concern. The Company has incurred significant operating losses and negative cash flows in recent years. Also, at December 31, 1998 the Company was below the $4 million minimum net tangible assets, as defined, required for its current listing on the NASDAQ National Market System. In March 1999, the Company's shareholders' equity was increased by approximately $9.6 million through the conversion of its $10 million convertible debenture into common stock. Coincident with that debt conversion, the Company's Series A Redeemable Convertible Preferred Stock was converted into Series B Redeemable Convertible Preferred Stock. These Preferred Stocks have certain Redemption Events, which if such events occurred, would provide the holder with the right to require the Company to purchase their shares for cash which would adversely affect the Company. (See Note N to the Consolidated Financial Statements.) Accordingly, where these rights exist such Redeemable Securities are categorized outside of shareholders' equity and, thus, do not qualify as equity for the purposes of the NASDAQ minimum net tangible asset requirement. Also, security holders may have other rights/claims in connection with the March 1999 transactions described above. To further increase the Company's net tangible assets and in order to help further ensure the Company's compliance with NASDAQ listing requirements, management is in the process of negotiating with participants in the March 1999 debt conversion and Preferred Stock exchange to obtain waivers of any redemption or recession rights. These waivers, if obtained, would eliminate the holders' cash redemption rights. This would qualify all related securities for classification in permanent stockholders' equity and increase the Company's qualifying net tangible assets. If such waivers are obtained, then management believes that the Company's current liquidity would be sufficient to meet its cash needs for its existing business through fiscal 1999. However, there can be no assurance that management's efforts in this regard will be successful. If management is not successful in obtaining such waivers, and it continues to incur operating losses it could fall below the minimum net asset requirement needed to qualify for ongoing listing on NASDAQ. Management's plans in this case include, among other things, attempting to improve (i) operating cash flow through increased license sales and service revenue, and (ii) increasing the level of anticipated streamlining of its selling, administration and development functions. However there is no assurance that such plans, if implemented, will be sufficient. Further, recently there have been announcements of potential changes in senior management, which increase the uncertainty of whether existing management plans will be executed. Also, the Company is considering certain significant acquisitions which depending on net liabilities assumed, if any, and on the success of cost reduction efforts to bring the acquisitions to break-even, may require additional funding. (See Note U to the Consolidated Financial Statements.) However, there can be no assurance that such acquisitions will occur, or whether additional funds required, if any, would be available to Base Ten. If current cash and working capital reduced by cash used in operations in 1999 is not sufficient to satisfy the Company's liquidity and minimum net tangible asset requirements, the Company will seek to obtain additional equity financing. Additional funding may not be available when needed or on terms acceptable to the Company. If the Company were required to raise additional financing for the matters described above and/or to continue to fund expansion, develop and enhance products and service, or otherwise respond to competitive pressures, there is no assurance that adequate funds will be available or that they will be available on terms acceptable to the Company. Such a limitation could have a material adverse effect on the Company's business; financial condition or operations and the financial statements do not include any adjustment that could result therefrom. During 1998 the Company eliminated $5.5 million of long-term debt as the convertible debenture holders converted these $5.5 million, 8.0% debentures into 1,490,805 shares of Class A Common Stock. Subsequent to year end, on March 5, 1999, the holder of the $10 million, 9.01% convertible debenture converted this debenture into 2,500,000 shares of Class A Common Stock which increased shareholders' equity by approximately $9.6 million including a non-cash charge of approximately $5.5 million. As a result of these debenture conversions, the Company will realize an annual interest expense savings of approximately $1.3 million. For further discussion of these debentures see Note L to the Consolidated Financial Statements. On November 10, 1998, the shareholders approved the sale and issuance of Series B Convertible Preferred Stock (subject to the execution of definitive agreements) and the issuance of Class A Common Stock Purchase Warrants to the Series A Convertible Preferred Stockholders that would receive Series B Convertible Preferred Stock. The sale and issuance of Series B Convertible Preferred Stock ("Series B Preferred Shares") to the Series A Convertible Preferred Stockholders occurred in March 1999 and was in the form of an even exchange for Series A Convertible Preferred Stock ("Series A Preferred Shares"). The terms of the Series B Preferred Shares are similar to the Series A Preferred Shares, except that: (a) the Series B Preferred Shares have a conversion price of that number of shares determined by dividing the Mandatory Redemption Price by $4.00, as defined in the Series A Preferred Stock Agreement, whereas the conversion price of the Series A Preferred Shares was equal to the lesser of (i) $16.25 or (ii) the Weighted Volume Average Price (as defined) of the Class A Common Stock prior to the conversion date limited to 3,040,000 shares; (b) the Series B Preferred Shares, as a result of the conversion price of $4.00, does not provide the holder with the option to receive a subordinated 8% promissory note, as the Series A Preferred Shares provides; and (c) there will be no dividend payment due based on the price of the Class A Common Stock, as the Series A Preferred Shares provides. As a result of the exchange of Series A Preferred Shares for Series B Preferred Shares, preferred stock dividends are no longer required to be paid by the Company. The issuance of Class A Common Stock Purchase Warrants to the Series A Preferred Stockholders that received Series B Preferred Shares provided for the issuance of 80,000 Class A Common Stock Purchase Warrants for each $1 million of principal amount of the Series A Preferred Shares outstanding on November 10, 1998 in addition to certain other Series A Preferred Shares which were converted at $4.00 per share between September 1, 1998 and November 10, 1998. These purchase warrants are four-year warrants exercisable at $3.00, and provide for mandatory exercise upon the occurrence of certain events. During 1998, 5,798 shares of Series A Convertible Preferred Stock were converted to 1,917,806 shares of Class A Common Stock. Subsequent to year-end, on March 5, 1999, the outstanding shares of Series A Convertible Preferred Stock were exchanged for Series B Convertible Preferred Stock. For further discussion of the Series A and B Preferred Shares and Common Stock see Note N and Note O to the Consolidated Financial Statements. As discussed elsewhere in this Annual Report on Form 10-K, the Company is a 9% shareholder in uPACS LLC, a limited liability company which has developed a system for archiving ultrasound images with networking, communication and off-line measurement capabilities. During the fourth quarter of 1998, the Company determined that it did not have the required resources to devote to both its core manufacturing execution software business and the uPACS(TM) business, and as a result, initiated a search for a potential buyer of the LLC and its technology. At December 31, 1998, the LLC had substantially exhausted its capital resources and, as of the filing date of this annual report on Form 10-K, a buyer had not yet been located. The Company currently intends to fund the LLC operation during the search for a buyer. The Company anticipates such contributions to total $500,000. On March 16, 1999, the Company's Board of Directors agreed to proceed with negotiations with the acquisition of Almedica Technology Group (Almedica), a wholly owned subsidiary of Almedica International, Inc. in a stock transaction. Almedica develops clinical label and materials management software for the pharmaceutical industry essential to the management of clinical trials. The acquisition, which is subject to the negotiation of final terms and related execution of a definitive agreement, is expected to close before the end of May 1999. The Company currently anticipates cash outlays related to this acquisition of Almedica to be approximately $0.5 - $1.0 million for fiscal 1999. * See Note U to the Consolidated Financial Statements for more information. On March 16, 1999, the Company's Board of Directors approved the commencment of preliminary discussions which could lead to an acquisition of Select Software Tools, plc (NASDAQ: SLCTY) (Select) in a stock transaction. Also, in connection with these preliminary discussions with Select, the Company agreed to loan Select up to $1.0 million. The acquisition is subject to the negotiation of final terms and execution of a definitive purchase agreement, and the approval of Select stockholders. On March 26, 1999, the Company loaned $0.7 million to Select under a promissory note. If the Select acquisition occurs, the Company currently expects cash outlays related to the acquisition of Select to be approximately $5 million for fiscal 1999, including the $0.7 million loan. * The Company believes that Select took certain restructuring actions in the second half of 1998 and early 1999 in an effort to significantly reduce its expense base. The Company and Select have initially identified additional cost reductions which are intended to bring Select to break-even by closing or shortly after the date of acquisition by Base Ten. If the Select acquisition occurs, depending on net liabilities of Select assumed by the Company at the date of acquisition, if any, and on the success of these cost reduction efforts, in bringing Select to net positive cash flow, the Company may need to acquire additional funding in 1999.* See Note U to the Consolidated Financial Statements for more information. The Company is currently evaluating its selling, administrative and development functions with the intention of further streamlining operations and reducing operating expenses. The Company anticipates that decisions based on this evaluation will be made in the first half of 1999. Ensuing actions may result in certain nonrecurring charges during 1999; the extent of such charges is not yet quantifiable. Possible Change Of Control. On March 17, 1999, Drew Sycoff, a principal of Andrew Garrett & Company, suggested to Thomas E. Gardner, the Chief Executive Officer of the Company, on behalf Mr. Sycoff's clients, including Jesse Upchurch, the beneficial owner of more than 40% of the combined voting power of the Company, that Mr. Gardner should consider resigning and that if he were to resign, that Mr. Sycoff would be able to negotiate a transition. In a subsequent conversation on the same day, Mr. Gardner offered Mr. Sycoff an opportunity to present his viewpoints to the Board of Directors and offered to call a special meeting of the Board if Mr. Sycoff wanted an early meeting. Mr. Sycoff indicated that the matter was not urgent and such presentation, if one were to be made, could wait at least until after the annual meeting of shareholders which was then anticipated to be held in May, 1999. On April 1, 1999, at a meeting of the board of directors of the Company, the board gave to Mr. Gardner its unqualified continuing support. However, on April 2, 1999 Mr. Sycoff, on behalf of his clients, demanded Mr. Gardner's resignation, and the resignations of the entire board of directors. Mr. Sycoff also indicated that unless the Board of Directors resigned before the annual meeting of shareholders, he would, on behalf of the shareholders whom he represented, commence a proxy contest with respect to the annual election of directors. The Company does not yet know the impact, if any, that such change in control would have on the Company's ability to consummate the Almedica acquisition or on the preliminary discussions regarding Select. The Company is relying on its leading products, BASE10(TM)ME, BASE10(TM)CS and BASE10(TM)FS to stimulate new orders. Neither the additional development of the Company's MES products nor the consequential generation of cash can be assured, either in time or amount, nor is there any assurance that such amounts will be sufficient for the Company's needs. In the absence of such orders or the promise thereof, neither of which can be assured, as well as in connection with its expected capital needs for the year 2000 and beyond, the Company may elect to seek additional sources of capital and may also elect to reduce the pace of its development of its products and/or establish other cost reduction measures, which could adversely impact the Company. In the event the Company elects to seek additional capital there can be no assurance that such funds or capital would be available on the terms or in the amounts needed. * Item 8. Financial Statements and Supplementary Data - - ----------------------------------------------------
Index to Financial Statements Page Report of Independent Accountants....................................................................... F-1 Independent Auditors' Report............................................................................ F-2 Consolidated Balance Sheets - December 31, 1998, December 31, 1997 and October 31, 1997 ................ F-3 Consolidated Statements of Operations - Years ended December 31, 1998 and October 31, 1997 and 1996 and the Two Month Transition Period from November 1, 1997 through December 31, 1997............. F-4 Consolidated Statements of Shareholders' Equity (Deficiency) - Years ended December 31, 1998 and October 31, 1997 and 1996 and the Two Month Transition Period from November 1, 1997 through December 31, 1997.................................................................................... F-5 Consolidated Statements of Cash Flows - Years ended December 31, 1998 and October 31, 1997 and 1996 and the Two Month Transition Period from November 1, 1997 through December 31, 1997........ F-7 Notes to Consolidated Financial Statements.............................................................. F-8
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - - ------------------------------------------------------------------------- On March 13, 1998, the Company engaged PricewaterhouseCoopers LLP, ("PricewaterhouseCoopers") independent certified public accountants, as the Company's auditors for the 1998 fiscal year. During the Company's two most recent fiscal years and the subsequent interim period preceding March 13, 1998, neither the Company (nor anyone acting on the Company's behalf) consulted with PricewaterhouseCoopers regarding the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company's financial statements, and neither a written report nor oral advice was provided to the Company by PricewaterhouseCoopers; or matters which would require disclosure pursuant to Items 304(a)(1)(iv) and 304(a)(1)(v) of Regulation S-K. On March 3, 1998, the Company dismissed Deloitte & Touche LLP ("Deloitte & Touche") as the principal accountant to audit the Registrant's financial statements. The reports of Deloitte & Touche on the Company's financial statements for the past two fiscal years did not contain an adverse opinion or a disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principles. The decision to dismiss Deloitte & Touche was approved by the Company's Board of Directors. During the two most recent fiscal years and the subsequent interim period preceding March 3, 1998, there were no disagreements with Deloitte & Touche on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Deloitte & Touche's satisfaction, would have caused Deloitte & Touche to make reference to the subject matter of the disagreement in connection with its report. During the two most recent fiscal years and the subsequent interim period preceding March 3, 1998, Deloitte & Touche did not advise the Company of any matters set forth in Item 304(a)(1)(v) of Regulation S-K. Deloitte & Touche furnished the Company with a letter addressed to the Securities and Exchange Commission stating that it agreed with this disclosure, which was filed as an exhibit to the Company's Current Report on Form 8-K, dated March 3, 1998. PART III Item 10. Directors and Executive Officers of the Registrant - - ------------------------------------------------------------ Information concerning the Company's executive officers is set forth in Part I, Item 1, under the caption "Executive Officers," and is incorporated herein by reference. The information called for by Item 10 concerning the Company's directors will be included in the Company Proxy Statement for its 1999 Annual Meeting of Shareholders, under the caption, "Election of Directors," and is incorporated herein by reference. Item 11. Executive Compensation - - -------------------------------- The information called for by Item 11 concerning Executive Compensation will be included in the Company's Proxy Statement for its 1999 Annual Meeting of Shareholders, under the caption, "Executive Compensation," and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management - - ------------------------------------------------------------------------ The information called for by item 12 concerning beneficial ownership of certain beneficial owners and management will be included in the Company's Proxy Statement for its 1999 Annual Meeting of Shareholders, under the caption, "Security Ownership of Certain Beneficial Owners and Management," and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions - - --------------------------------------------------------- The information called for by Item 13 concerning certain relationships and related transactions will be included in the Company's Proxy Statement for its 1999 Annual Meeting of Shareholders under the caption, "Certain Transactions with Related Parties," and is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statements and Reports on Form 8-K - - ---------------------------------------------------------------- (a) Financial Statements and Schedules: 1. Financial Statements: The Financial Statements listed in the Index under Item 8 are included in this Annual Report at the pages indicated. 2. Financial Statement Schedules: The financial statement schedules for which provision is made in Regulation S-X have been omitted because the required information is either presented in the Financial Statements or the Notes thereto or is not applicable. 3. Exhibits: See the Exhibit Index on pages 38 through 40 of this Annual Report. (b) Reports on Form 8-K: The Company filed a Current Report on Form 8-K, on November 20, 1998, for the sale of 6,666,666 shares of its Class A Common Stock at a purchase price of $3.00 per share for aggregate proceeds of $20,000,000. Report of Independent Accountants The Board of Directors and Shareholders Base Ten Systems, Inc. Trenton, New Jersey 08619 In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in shareholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Base Ten Systems, Inc. and its subsidiaries at December 31, 1998 and December 31, 1997 and the results of their operations and cash flows for the year ended December 31, 1998 and the two-months ended December 31, 1997 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion expressed above. The financial statements of Base Ten Systems, Inc., and its subsidiaries for the years ended October 31, 1997 and 1996 were audited by other independent accountants whose report dated February 6, 1998 expressed an unqualified opinion on those statements. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the financial statements, the Company has suffered recurring losses from operations and has redeemable preferred stock that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PRICEWATERHOUSECOOPERS LLP Florham Park, New Jersey April 12, 1999 See Notes to the Consolidated Financial Statements F-1 Independent Auditors' Report The Board of Directors and Shareholders Base Ten Systems, Inc. Trenton, New Jersey 08619 We have audited the consolidated balance sheets of Base Ten Systems, Inc. and subsidiaries as of October 31, 1997 and the related consolidated statements of operations, shareholders' equity (deficiency) and cash flows for each of the years in the period ended October 31, 1997 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Base Ten Systems, Inc. and subsidiaries as of October 31, 1997 and the results of their operations and their cash flows for each of the years in the period ended October 31, 1997 and 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Parsippany, New Jersey February 6, 1998 F-2
Base Ten Systems, Inc. and Subsidiaries Consolidated Balance Sheets (dollars in thousands, except par value) Assets December 31, December 31, October 31, 1998 1997 1997 --------------- ------------------- ------------------ Current Assets: Cash and cash equivalents......................................... $17,437 $ 9,118 $ 1,502 Accounts receivable, net.......................................... 2,372 1,583 1,808 Net assets held for sale.......................................... - - 5,338 Other current assets.............................................. 639 530 1,044 --------------- ------------------- ------------------ Total Current Assets........................................ 20,448 11,231 9,692 --------------- ------------------- ------------------ Property, plant and equipment, net................................... 5,026 4,346 4,305 Note receivable...................................................... 1,975 1,975 - Other assets......................................................... 6,372 6,861 7,220 --------------- ------------------- ------------------ Total Assets $33,821 $24,413 $21,217 =============== =================== ================== Liabilities, Redeemable Convertible Preferred Stock, and Shareholders' Equity (Deficiency) Current Liabilities: Accounts payable.................................................. $ 984 $ 282 $ 962 Accrued expenses.................................................. 3,152 4,106 5,653 Deferred revenue.................................................. 756 709 352 Current portion of financing obligation........................... 74 54 54 --------------- ------------------ ------------------- Total Current Liabilities................................... 4,966 5,151 7,021 --------------- ------------------ ------------------- Long-Term Liabilities: Long-term debt.................................................... 10,000 15,500 15,500 Financing obligation.............................................. 3,341 3,416 3,425 Other long-term liabilities....................................... 228 245 253 --------------- ------------------ ------------------- Total Long-Term Liabilities................................. 13,569 19,161 19,178 --------------- ------------------ ------------------- Base Ten Systems, Inc. and Subsidiaries Consolidated Balance Sheets (dollars in thousands, except par value) Assets December 31, December 31, October 31, 1998 1997 1997 --------------- ------------------- ------------------ Commitments and Contingencies - (Note K) Redeemable Convertible Preferred Stock Series A Preferred Stock, $1.00 par value, 997,801 shares authorized; issued and outstanding 14,942 shares at December 31, 1998 and 9,375 shares at December 31, 1997; aggregate liquidation value of $14,942 at December 31, 1998.......................................... 12,914 14,684 - Less: Subscription Receivable....................................... - (8,529) - --------------- ------------------ ----------------- 12,914 6,155 - Shareholders' Equity (Deficiency) Class A Common Stock, $1.00 par value, 60,000,000 shares authorized; issued and outstanding 18,659,748 shares at December 31, 1998; 7,828,719 shares at December 31, 1997, and 7,768,952 shares at October 31, 1997...................... 18,660 7,829 7,769 Class B Common Stock, $1.00 par value, 2,000,000 shares authorized; issued and outstanding 71,410 shares at December 31, 1998 and 445,121 shares at December 31, 1997 and October 31, 1997........................ 71 445 445 Additional paid-in capital....................................... 52,885 32,388 29,458 Accumulated Deficit.............................................. (68,767) (46,583) (42,647) --------------- ------------------ ------------------ 2,765 (5,921) (4,975) Accumulated other comprehensive income (loss).................... (196) (133) (7) Treasury Stock, 100,000 Class A Common Shares, at cost........... (282) - - --------------- ------------------ ------------------ Total Shareholders' Equity (Deficiency).................... 2,372 (6,054) (4,982) --------------- ------------------ ------------------- Total Liabilities, Redeemable Convertible Preferred Stock, and Shareholders' Equity (Deficiency).................. $ 33,736 $ 24,413 $ 21,217 =============== ================== ===================
See Notes to the Consolidated Financial Statements F-3
Base Ten Systems, Inc. and Subsidiaries Consolidated Statements of Operations (dollars in thousands, except per share data) Two Year ended months ended Year ended Year ended December 31, December 31, October 31, October 31, 1998 1997 1997 1996 ------------ ------------ -------------- ----------- License and related revenue................................ $ 2,727 $ -- $ 1,221 $ 454 Services and related revenue............................... 4,823 181 1,291 808 ------------ ------------ ------------- ------------- 7,550 181 2,512 1,262 Cost of revenues........................................... 9,639 1,457 6,387 4,423 Research and development................................... 2,002 25 147 404 Selling and marketing...................................... 5,003 569 2,736 2,049 General and administrative................................. 8,944 1,647 7,743 3,073 ------------ ------------ ------------- ------------- 25,588 3,698 17,013 9,949 ------------ ------------ ------------- ------------- Loss from continuing operations before other income (expense) and income tax benefit...................................... (18,107) (3,517) (14,501) (8,687) ------------ ------------ ------------- ------------- Other income (expense), net................................ (982) (197) (1,479) (410) ------------ ------------ ------------- ------------- Loss from continuing operations before income tax benefit.. (19,020) (3,714) (15,980) (9,097) ------------ ------------ ------------- ------------- Income tax benefit......................................... -- -- -- 684 ------------ ------------ ------------- ------------- Net loss from continuing operations........................ (19,020) (3,714) (15,980) (8,413) ------------ ------------ ------------- ------------- Discontinued operations: Loss from operations of Government Technology Division, net of income tax benefit of $363 in 1996...................... -- (222) (4,854) (546) Loss on sale............................................... -- -- (1,173) -- ------------ ------------ ------------- ------------- Loss from discontinued operations.......................... -- (222) (6,027) (546) ------------ ------------ ------------- ------------- Net loss................................................... $ (19,020) $ (3,936) $ (22,007) (8,959) ============ ============ ============= ============= Less: Dividends on Redeemable Convertible Preferred Stock.................................... (1,740) -- -- -- Accretion on Redeemable Convertible Preferred Stock.................................... (1,424) -- -- -- ------------ ------------ ------------- ------------- Net loss available for common shareholders................. $ (22,184) $ (3,936) $ (22,007) (8,959) ============ ============ ============= ============= Basic and diluted loss per share: Continuing operations...................................... $ (2.09) $ (0.45) $ (2.03) $ (1.09) Discontinued operations.................................... -- (0.03) (0.76) (0.07) ------------ ------------ ------------- ------------- Net loss per share......................................... $ (2.09) $ (0.48) $ (2.79) $ (1.16) ============ ============ ============= ============= Weighted average common shares outstanding - basic and diluted........................................ 10,618,000 8,258,000 7,895,000 7,743,000 ============ ============ ============= =============
See Notes to the Consolidated Financial Statements F-4 Base Ten Systems, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity (Deficiency) (dollars in thousands)
Class A Class B Additional Common Stock Common Stock Paid-In Shares Amount Shares Amount Capital - - -------------------------- ------------ ------------ ------------ ------------ ------------ Balance October 31, 1995 .............. 7,216,195 $ 7,216 458,474 $ 458 $ 24,410 Conversions: Common B to Common A .................. 5,418 5 (5,418) (5) -- Exercise of options ........... 137,351 138 -- -- 676 Retirement of treasury stock ................ -- -- (7,669) (8) -- Comprehensive Income (Loss): Net loss .................. -- -- -- -- -- Foreign currency translation ............... -- -- -- -- -- Unrealized gain on securities available for sale .................. -- -- -- -- -- Total Comprehensive Income (Loss):................. =============================== ========== ========== ============ ============ ========== Balance October 31, 1996 .............. 7,358,964 7,359 445,387 445 25,086 =============================== ========== ========== ============ ============ ========== =============================== ========== ========== ============ ============ ========== Conversions: Common B to Common A .................. 266 -- (266) -- -- Exercise of options ....................... 93,230 93 -- -- 506 Exercise of warrants ...................... 305,000 305 -- -- 1,017 Issuance of Common Stock: Interest payments ......... 11,492 12 -- -- 99 Compensation related to warrants and options issuance .......... -- -- -- -- 2,750 Comprehensive Income (Loss): Net loss .................. -- -- -- -- -- Foreign currency translation ............... -- -- -- -- -- Unrealized gain on securities available for sale .................. -- -- -- -- -- Total Comprehensive Income (Loss):... -- -- -- -- -- =============================== ========== ========== ============ ============ ========== Balance October 31, 1997 .............. 7,768,952 7,769 445,121 445 29,458 =============================== ========== ========== ============ ============ ========== =============================== ========== ========== ============ ============ ========== Exercise of options ........... 50,584 51 -- -- 445 Issuance of Common Stock: Interest payments ......... 9,183 9 -- -- 102 Common Stock Warrants, net of subscription receivable of $851 ............ -- -- -- -- 1,840 Compensation related to warrants and options issuance.. -- -- -- -- 543 Comprehensive Income (Loss): Net loss .................. -- -- -- -- -- Foreign currency translation ............... -- -- -- -- -- Unrealized loss on securities available for sale .................. -- -- -- -- -- Total Comprehensive Income (Loss): ................ -- -- -- -- -- =============================== ========== ========== ============ ============ ========== Balance at December 31, 1997 ............. 7,828,719 $ 7,829 445,121 $ 445 $ 32,388 =============================== ========== ========== ============ ============ ========== Accumulated Other Total Accumulated Comprehensive Treasury Stock Shareholders' Deficit Income (Loss) Shares Amount Equity ------------ ------------- ----------- ------------ ------------ Balance October 31, 1995 .............. $ (11,681) $ (142) -- $ -- $ 20,261 Conversions: Common B to Common A .................. -- -- -- -- -- Exercise of options ........... -- -- -- (8) 806 Retirement of treasury stock ................ -- -- -- 8 -- Comprehensive Income (Loss): Net loss .................. (8,959) -- -- -- (8,959) Foreign currency translation ............... -- (17) -- -- (17) Unrealized gain on securities available for sale .................. -- 49 -- -- 49 Total Comprehensive Income (Loss):................. -- -- -- -- (8,927) =============================== ============ ========== =========== ============ ========== Balance October 31, 1996 .............. (20,640) (110) -- -- 12,140 =============================== ============ ========== =========== ============ ========== =============================== ============ ========== =========== ============ ========== Conversions: Common B to Common A .................. -- -- -- -- -- Exercise of options ....................... -- -- -- -- 599 Exercise of warrants ...................... -- -- -- -- 1,322 Issuance of Common Stock: Interest payments ......... -- -- -- -- 111 Compensation related to warrants and options issuance .......... -- -- -- -- 2,750 Comprehensive Income (Loss): Net loss .................. (22,007) -- -- -- (22,007) Foreign currency translation ............... -- 9 -- -- 9 Unrealized gain on securities available for sale .................. -- 94 -- -- 94 Total Comprehensive Income (Loss):... -- -- -- -- (21,904) =============================== ============ ========== =========== ============ ========== Balance October 31, 1997 .............. (42,647) (7) -- -- (4,982) =============================== ============ ========== =========== ============ ========== =============================== ============ ========== =========== ============ ========== Exercise of options ........... -- -- -- -- 496 Issuance of Common Stock: Interest payments ......... -- -- -- -- 111 Common Stock Warrants, net of subscription receivable of $851 ............ -- -- -- -- 1,840 Compensation related to warrants and options issuance.. -- -- -- -- 543 Comprehensive Income (Loss): Net loss .................. (3,936) -- -- -- (3,936) Foreign currency translation ............... -- (45) -- -- (45) Unrealized loss on securities available for sale .................. -- (81) -- -- (81) Total Comprehensive Income (Loss):................. -- -- -- -- (4,062) =============================== ============ ========== =========== ============ ========== Balance at December 31, 1997 ............. $ (46,583) $ (133) -- $ -- $ (6,054) =============================== ============ ========== =========== ============ ==========
See Notes to the Consolidated Financial Statements F-5
Base Ten Systems, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity (Deficiency) (con't) (dollars in thousands) Class A Class B Common Stock Common Stock Shares Amount Shares Amount Balance at December 31, 1997 ..... 7,828,719 $ 7,829 445,121 $ 445 ========================== ========== ========== ========== ========== Conversions: Common B to Common A ............. 567,980 568 (378,657) (379) Preferred A to Common A ............. 1,917,806 1,918 -- -- Debenture to Common A ............. 1,490,805 1,491 -- -- Exercise of options ...... 150,232 150 4,946 5 Issuance of Common Stock: Private placement .... 6,666,666 6,666 -- -- Interest payments .... 30,755 31 -- -- Employee stock purchase plan ........ 6,785 7 -- -- Compensation related to warrants and options issuance ......... -- -- -- -- Dividends on Redeemable Preferred Stock .................... -- -- -- -- Accretion on Redeemable Preferred Stock .................... -- -- -- -- Collection of Common Stock Warrants Subscription Receivable .. -- -- -- -- Treasury stock purchase ................. -- -- -- -- Comprehensive Income (Loss): Net loss ............. -- -- -- -- Foreign currency translation .......... -- -- -- -- Unrealized gain on securities available for sale ............. -- -- -- -- Total Comprehensive Income (Loss):............ -- -- -- -- ========================== ========== ========== ========== ========== Balance at December 31, 1998 ........ 18,659,748 $ 18,660 71,410 $ 71 ========================== ========== ========== ========== ========== Accumulated Additional Other Total Paid-In Accumulated Comprehensive Treasury Stock Shareholders' Capital Deficit Income Shares Amount Equity ============ ============ ============== ========== ============ ============== Balance at December 31, 1997 ..... $ 32,388 $ (46,583) $ (133) -- $ -- $ (6,054) ========================== ========== =========== ========== ========== =========== ============== Conversions: Common B to Common A ............. (189) -- -- -- -- -- Preferred A to Common A ............. 3,016 -- -- -- -- 4,934 Debenture to Common A ............. 3,680 -- -- -- -- 5,171 Exercise of options ...... 525 -- -- -- -- 680 Issuance of Common Stock: Private placement .... 12,127 -- -- -- -- 18,793 Interest payments .... 157 -- -- -- -- 188 Employee stock purchase plan ........ 8 -- -- -- -- 15 Compensation related to warrants and options issuance ......... 322 -- -- -- -- 322 Dividends on Redeemable Preferred Stock .................... -- (1,740) -- -- -- (1,740) Accretion on Redeemable Preferred Stock .................... -- (1,424) -- -- -- (1,424) Collection of Common Stock Warrants Subscription Receivable .. 851 -- -- -- -- 851 Treasury stock purchase... -- -- -- (100,000) (281) (281) Comprehensive Income (Loss): Net loss ............. -- (19,020) -- -- -- (19,020) Foreign currency translation .......... -- -- (55) -- -- (55) Unrealized gain on securities available for sale ............. -- -- (8) -- -- (8) Total Comprehensive Income (Loss):............ -- -- -- -- -- (19,083) ========================== ========== ========== ========== ========== ============ ========== Balance at December 31, 1998 ........ $ 52,885 $ (68,767) $ (196) (100,000) $ (282) $ 2,372 ========================== ========== ========== ========== ========== ============ ==========
See Notes to the Consolidated Financial Statements F-6
Base Ten Systems, Inc. and Subsidiaries Consolidated Statements of Cash Flows (dollars in thousands) Two Months Year Ended Ended Year Ended Year Ended December 31, December 31, October 31, October 31, 1998 1997 1997 1996 - - ------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net loss $ (19,020) $ (3,936) $ (22,007) $ (8,959) Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities of Continuing Operations: Depreciation and amortization 3,295 360 3,703 4,172 Stock-based compensation 322 543 2,750 -- Deferred gain on sale of building (19) (3) (19) (19) Deferred income taxes -- -- -- (83) Changes in operating assets and liabilities, excluding effects of discontinued business: Accounts receivable (789) 225 2,008 (1,481) Other current assets (117) 433 305 366 Accounts payable and accrued expenses (802) (1,657) 3,792 1,766 Income taxes payable -- -- -- (1,038) - - ------------------------------------------------------------------------------------------------------------------------------- Net Cash Used in Operations (17,130) (4,035) (9,468) (5,276) =============================================================================================================================== Cash Flows from Investing Activities: Additions to property, plant and equipment (592) (244) (617) (1,058) Additions to capitalized software costs and other assets (724) (148) (3,360) (4,126) Purchase of assets related to FlowStream product (2,099) -- -- -- - - ------------------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (3,415) (392) (3,977) (5,184) =============================================================================================================================== Cash Flows from Financing Activities: Repayment of amounts borrowed (53) (14) (59) (113) Proceeds from issuance of long-term debt -- -- 5,500 10,000 Proceeds from issuance of redeemable preferred stock 9,380 7,995 -- -- Proceeds from issuance of common stock 19,592 607 2,032 806 Proceeds from sale of discontinued business -- 3,500 -- -- - - ------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided from Financing Activities 28,919 12,088 7,473 10,693 =============================================================================================================================== Effect of Exchange Rate Changes on Cash (55) (45) 9 11 =============================================================================================================================== Net (Decrease)/Increase In Cash 8,319 7,616 (5,963) 244 Cash, beginning of year 9,118 1,502 7,465 7,221 - - ------------------------------------------------------------------------------------------------------------------------------- Cash, end of year $ 17,437 $ 9,118 $ 1,502 $ 7,465 =============================================================================================================================== Supplemental Disclosures of Cash Flow Information: Cash paid during the year for interest $ 1,401 $ 88 $ 937 $ 485 =============================================================================================================================== Supplemental Disclosures of Non-Cash Investing and Financing Activities: Retirement of treasury common stock $ -- $ -- $ -- $ 8 Treasury stock purchase obligation $ 281 $ -- $ -- $ -- ===============================================================================================================================
See Notes to the Consolidated Financial Statements F-7 Base Ten Systems, Inc. and Subsidiaries Notes to Consolidated Financial Statements Years Ended December 31, 1998, October 31, 1997 and 1996 and Two Months Ended December 31, 1997 A. Basis of Presentation and Liquidity - - -------------------------------------- The Company's financial statements have been prepared on the basis that it will continue as a going concern. The Company has incurred significant operating losses and negative cash flows in recent years. Also, at December 31, 1998 the Company was below the $4 million minimum net tangible assets, as defined, required for its current listing on the NASDAQ National Market System. In March 1999, the Company's shareholders' equity was increased by approximately $9.6 million through the conversion of its $10 million convertible debenture into common stock. Coincident with that debt conversion, the Company's Series A Redeemable Convertible Preferred Stock was converted into Series B Redeemable Convertible Preferred Stock. These Preferred Stocks have certain Redemption Events, which if such events occurred, would provide the holder with the right to require the Company to purchase their shares for cash which would adversely affect the Company. (See Note N to the Consolidated Financial Statements.) Accordingly, where these rights exist such Redeemable Securities are categorized outside of shareholders' equity and, thus, do not qualify as equity for the purposes of the NASDAQ minimum net tangible asset requirement. Also, security holders may have other rights/claims in connection with the March 1999 transactions described above. To further increase the Company's net tangible assets and in order to help further ensure the Company's compliance with NASDAQ listing requirements, management is in the process of negotiating with participants in the March 1999 debt conversion and Preferred Stock exchange to obtain waivers of any redemption or recession rights. These waivers, if obtained, would eliminate the holders' cash redemption rights. This would qualify all related securities for classification in permanent stockholders' equity and increase the Company's qualifying net tangible assets. If such waivers are obtained, then management believes that the Company's current liquidity would be sufficient to meet its cash needs for its existing business through fiscal 1999. However, there can be no assurance that management's efforts in this regard will be successful. If management is not successful in obtaining such waivers, and it continues to incur operating losses it could fall below the minimum net asset requirement needed to qualify for ongoing listing on NASDAQ. Management's plans in this case include, among other things, attempting to improve (i) operating cash flow through increased license sales and service revenue, and (ii) increasing the level of anticipated streamlining of its selling, administration and development functions. However there is no assurance that such plans, if implemented, will be sufficient. Further, recently there have been announcements of potential changes in senior management, which increase the uncertainty of whether existing management plans will be executed. Also, the Company is considering certain significant acquisitions which depending on net liabilities assumed, if any, and on the success of cost reduction efforts to bring the acquisitions to break-even, may require additional funding. (See Note U to the Consolidated Financial Statements.) However, there can be no assurance that such acquisitions will occur, or whether additional funds required, if any, would be available to Base Ten. If current cash and working capital reduced by cash used in operations in 1999 is not sufficient to satisfy the Company's liquidity and minimum net tangible asset requirements, the Company will seek to obtain additional equity financing. Additional funding may not be available when needed or on terms acceptable to the Company. If the Company were required to raise additional financing for the matters described above and/or to continue to fund expansion, develop and enhance products and service, or otherwise respond to competitive pressures, there is no assurance that adequate funds will be available or that they will be available on terms acceptable to the Company. Such a limitation could have a material adverse effect on the Company's business; financial condition or operations and the financial statements do not include any adjustment that could result therefrom. B. Description of Business - - --------------------------- Base Ten Systems, Inc. and subsidiaries ("Base Ten" or the "Company") is engaged in the development of software applications for the pharmaceutical and medical device industries. The Company's product lines include manufacturing execution systems (MES), medical screening and image processing software. The Company's primary focus is its manufacturing execution systems which include BASE10(TM)ME (formerly PHARM2(TM)), BASE10(TM)FS and BASE10(TM)CS. The MES products are designed to reduce time and costs associated with regulatory compliance, manage the elements of production materials, equipment, personnel, process instructions, as well as allow rapid fulfillment of requests and traceability for clinical supplies. For the periods ended October 31, 1997 and December 31, 1997, the Company was also engaged, through its Government Technology Division ("GTD"), in the design and manufacture of electronic systems employing safety critical software for the defense industry. Effective December 31, 1997, the GTD was sold by the Company. See Note S to the Consolidated Financial Statements. C. Summary of Significant Accounting Policies - - ---------------------------------------------- 1. Principles of Consolidation - The consolidated financial statements include the accounts of Base Ten and its wholly owned subsidiaries. All significant inter-company accounts, transactions and profits have been eliminated. 2. Discontinued Operations - As discussed more thoroughly in Note S to the Consolidated Financial Statements, the results of operations and the net assets of the Government Technology Division have been reported separately as discontinued operations for all periods presented and net assets held for sale at October 31, 1997 in the accompanying financial statements. 3. Change of Fiscal Reporting Period - In January 1998, the Board of Directors approved a change of the Company's fiscal year end from October 31 to December 31. 4. Risks and Uncertainties - The Company operates in the publicly traded software industry, which is highly competitive and rapidly changing. The Company has had a history of significant losses from operations and is subject to all of the risks inherent in a technology business, including but not limited to: potential for significant technological changes in the industry or customer requirements, potential for emergence of competitive products with new capabilities or technologies, ability to manage future growth, ability to attract and retain qualified employees, dependence on key personnel, limited senior management resources, success of its research and development, protection of intellectual property rights, potentially long sales and implementation cycles and ongoing satisfaction of NASDAQ minimum net tangible asset requirements for continued listing. The preparation of financial statements in accordance with generally accepted accounting standards requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include the allowance for doubtful accounts receivable, the total costs to be incurred under software license agreements requiring significant customizations or modifications and the useful lives of computer software costs. Actual costs and results could differ from these estimates. 5. Revenue Recognition - The Company licenses software under license agreements and provides services including maintenance, training and consulting. In general, software license revenues are recognized upon shipment of the software to the customer where there are no significant customizations or modifications required. Revenues on all software license transactions in which there are significant customizations or modifications are recognized on the percentage of completion basis. Progress under percentage of completion method is measured based on management's best estimate of the cost of work completed in relation to the total cost of work to be performed under the contract. Maintenance revenues for maintaining, supporting and providing periodic upgrades are deferred and recognized ratably over the maintenance period which is generally one year. Revenues from training and consulting services are recognized as such services are performed and are on a time and material basis. F-8 On January 1, 1998, the Company adopted Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP 97-2 which supersedes Statement of Position 91-1, "Software Revenue Recognition", generally requires revenue earned on multiple element software arrangements to be allocated to each element based on vendor-specific objective evidence of the relative fair values of the elements. Absent vendor-specific evidence of fair value of all elements in a multiple-element arrangement, all revenue from the arrangement is deferred until such evidence exists or until all elements are delivered. The adoption of SOP 97-2 has not had a material impact on the Company's results of operations. In March 1998, the AICPA issued Statement of Position 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2" ("SOP 98-4"). SOP 98-4 deferred, until the Company's fiscal year beginning January 1, 1999, the application of certain passages in SOP 97-2, which limit what is considered vendor-specific objective evidence necessary to recognize revenue for software licenses in multiple-element arrangements when undelivered elements exist. In December 1998, the AICPA issued Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions"("SOP 98-9"). SOP 98-9 further deferred those passages deferred by SOP 98-4 until the Company's fiscal year beginning January 1, 2000. SOP 98-9 also amends certain passages of SOP 97-2 which address the allocation of discounts in multiple element arrangements. Management has not determined the impact, if any, that the application of SOP 98-9 will have on its consolidated financial position or results of operations. 6. Property, Plant and Equipment - Property, plant and equipment are carried at cost and depreciated over estimated useful lives, principally on the straight-line method. The estimated useful lives used for the determination of depreciation and amortization are: Leased asset - building 30 years Leasehold improvements 5 to 10 years Furniture, fixtures and equipment 3 to 10 years Maintenance and repairs are charged to expense as incurred; expenditures for leasehold improvements are generally capitalized. Upon sale or retirement of an asset, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is recognized. 7. Research, Development and Computer Software Costs - In accordance with Statement of Financial Accounting Standards No. 86, "Accounting for Costs for Computer Software to be Sold, Leased or Otherwise Marketed" ("FAS 86"), the Company capitalizes certain software development costs for new products once it is determined that technological feasibility is achieved. Costs incurred prior to the determination of technological feasibility and costs associated with maintenance of existing products are expensed as incurred. The cost of purchased software is capitalized when related to a product which has achieved technological feasibility or that has an alternative future use. Commencing upon initial product release, these costs are amortized based on the straight-line method over the estimated useful life of not greater than four years. 8. Long-Lived Assets - The Company accounts for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and Long Lived Assets to be Disposed Of" ("FAS 121"). FAS 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company performs quarterly reviews of the recoverability of its capitalized software costs and other long lived assets based on anticipated revenues and cash flows from sales of these products. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows at the rate the Company utilizes to evaluate potential investments. The Company estimates fair value based on the best information available making whatever estimates, judgments and projections are considered necessary. The Company has evaluated its long-lived assets and determined that no material impairment of these assets existed at December 31, 1998. F-9 In the second quarter of fiscal 1996 the Company conducted its regular quarterly review of the recoverability of its capitalized software costs and determined that neither PRENVAL nor uPACS would achieve sufficient revenues in future periods to justify retention of the related capitalized costs. Accordingly the Company wrote off the $2.4 million balance of such capitalized costs to cost of revenues. 9. Cash and Cash Equivalents - The Company considers all investments with an original maturity of three months or less at date of acquisition to be cash equivalents. 10. Earnings Per Share - The Company calculates earnings per share in accordance with the provisions of Statement of Financial Accounting Standard No. 128, "Earnings Per Share" ("FAS 128"). FAS 128 requires the Company to present Basic Earnings Per Share which excludes dilution and Diluted Earnings Per Share which includes potential dilution. 11. Fair Value of Financial Instruments - The fair value of certain financial instruments, including cash, accounts receivable, accounts payable, and other accrued liabilities, approximates the amount recorded in the balance sheet because of the relatively current maturities of these financial instruments. The fair market value of long term debt at December 31, 1998, December 31, 1997 and October 31, 1997 approximates the amounts recorded in the balance sheet based on information available to the Company with respect to interest rates and terms for similar financial instruments. 12. Foreign Currency Translation - The accounts of the consolidated foreign subsidiaries are translated into United States dollars in accordance with Statement of Financial Accounting Standard No. 52, "Foreign Currency Translation" ("FAS 52"). All balance sheet accounts have been translated using the current rate of exchange at the balance sheet date. Results of operations have been translated using the average rates prevailing throughout the year. Translation gains or losses resulting from the changes in the exchange rates from year-to-year are accumulated in a separate component of shareholders' equity. Transaction gains and losses are immaterial. 13. Income Taxes - Deferred income taxes are determined based on the tax effect of the differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets and liabilities are classified as either current or noncurrent based generally on the classification of the related asset or liability. 14. Investments - The Company accounts for its investments using Statement of Financial Accounting Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities"("FAS 115"). This standard requires that certain debt and equity securities be adjusted to market value at the end of each accounting period. Unrealized market value gains and losses are charged to earnings if the securities are traded for short-term profit. Otherwise, such unrealized gains and losses are charged or credited to a separate component of shareholders' equity. Management determines the proper classifications of investments in obligations with fixed maturities and marketable equity securities at the time of purchase and reevaluates such designations as of each balance sheet date. At December 31, 1998, December 31, 1997 and October 31, 1997, all securities covered by FAS 115 were designated as available for sale. Accordingly, these securities are stated at fair value, with unrealized gains and losses reported in a separate component of shareholders' equity. Securities available for sale at December 31, 1998, December 31, 1997 and October 31, 1997, consisted of common stock with a cost basis of $50,000, $50,000 and $150,000, respectively and are included in other current assets. Differences between cost and market of $54,000, $62,000 and $143,000 were included as a component of "accumulated other comprehensive income" in shareholders' equity, as of December 31, 1998, December 31, 1997 and October 31, 1997, respectively. 15. Segment Information - On January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"). FAS 131 supersedes Statement of Financial Accounting Standards No. 14, "Financial Reporting for Segments of a Business Enterprise" ("FAS 14") replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. FAS 131 also requires disclosures about products and services, geographic areas and major customers. The adoption of FAS 131 did not affect results of operations or the financial position but did affect the disclosure of segment information. F-10 16. Comprehensive Income - On January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and net unrealized gains (losses) on securities and is presented in the consolidated statements of shareholders' equity. The Statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. Prior year financial statements have been reclassified to conform to the requirements of FAS 130. 17. Reclassifications - Certain reclassifications have been made to prior year financial statements to conform to the current year presentation. D. Acquisition - - --------------- On February 19, 1998, the Company acquired certain assets and assumed certain liabilities of Consilium, Inc. ("Consilium"), a software developer that specialized in manufacturing execution systems for the pharmaceutical, chemical and semi-conductor industries. The assets purchased related to the FlowStream product line of Consilium, which was sold to the pharmaceutical and chemical markets. Under the terms of the agreement, the Company paid Consilium $1.5 million in cash and included assumed certain FlowStream-related liabilities of Consilium, which together with transaction costs in cash of approximately $600,000, resulted in a total purchase cost of $3.0 million. The agreement also provides for additional payments based upon a percentage of the excess of targeted sales of the FlowStream product, as defined, for the years ended December 31, 1998 and 1999, respectively. No additional payments were required for 1998. The cash portion of the acquisition was financed with the Company's available cash balance. This acquisition was accounted for by the purchase method of accounting. The purchase price was allocated to the assets acquired based on their estimated fair values. Equipment and furniture were purchased at estimated fair value and are being depreciated over estimated lives of three to ten years. Other intangible assets acquired are being amortized on a straight-line basis over their estimated lives of three to seven years. Unaudited Pro-forma Results - - --------------------------- The following unaudited pro-forma information presents the results of operations of the Company as if the acquisition had taken place on November 1, 1996 (dollars in thousands, except per share data):
Two Months Year Ended Ended Year Ended December 31, December 31, October 31, 1998 1997 1997 ---- ---- ---- Revenue $ 8,259 $ 1,044 $ 7,839 Net loss (19,869) (4,969) (28,207) - - -------- -------- ------- -------- Net loss per common share - basic and diluted $ (2.17) $ (0.60) $ (3.57) Weighted average common shares - basic and diluted 10,618,000 8,258,000 7,895,000 ---------- --------- ---------
F-11 These pro-forma results of operations have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the acquisition occurred on the date indicated, or which may result in the future. E. Accounts Receivable - - ----------------------- Accounts receivable are comprised of billed receivables arising from recognized and deferred revenues and unbilled receivables which result from consulting services. All of the unbilled receivables are expected to be billed during the following year. The Company does not require collateral for its receivables. Reserves are maintained for potential credit losses. The principle components of accounts receivables are as follows (dollars in thousands):
December 31, December 31, October 31, 1998 1997 1997 ---- ---- ---- Billed receivables $ 2,456 $ 537 $ 504 Unbilled receivables 236 1,186 1,444 --- ----- ----- 2,962 1,723 1,948 Less: Allowance for doubtful accounts 320 140 140 --- --- --- $ 2,372 $ 1,583 $ 1,808 =========== =========== ===========
Bad debt expense amounted to $449,000 for the year ended December 31, 1998 and $140,000 for the year ended October 31, 1997. There was not any bad debt expense recorded during the two month period ended December 31, 1997 and the year ended October 31, 1996. F. Property, Plant and Equipment - - --------------------------------- Property, plant and equipment at December 31, 1998 and 1997 and October 31, 1997 includes the following amounts (dollars in thousands):
December 31, December 31, October 31, 1998 1997 1997 ---- ---- ---- Leasehold improvements $ 343 $ 156 $ 149 Furniture, fixtures and equipment 5,160 4,255 4,018 Land and building 3,600 3,600 3,600 ----- ----- ----- 9,103 8,011 7,767 Less: Accumulated depreciation 4,077 3,665 3,462 ----- ----- ----- $ 5,026 $ 4,346 $ 4,305 =========== =========== ===========
Depreciation expense amounted to $412,000, $203,000, $530,000, and $462,000, in fiscal 1998, the two month period December 31, 1997, fiscal 1997, and fiscal 1996, respectively. G. Other Assets - - ---------------- Other assets at December 31, 1998 and 1997 and October 31, 1997 includes the following amounts (dollars in thousands):
December 31, December 31, October 31, 1998 1997 1997 ---- ---- ---- Patents, net $ 356 $ 395 $ 404 Capitalized software costs, net 2,943 4,548 4,815 Debenture issue costs, net 393 971 1,032 Deposit-long term financing obligation 550 550 550 Long-term receivable -- 397 419 Other acquired intangibles, net 2,130 -- -- ------------ -------------- ----------- -- $ 6,372 $ 6,861 $ 7,220 ============ ============== ===========
F-12 Accumulated amortization related to the patents at December 31, 1998 and 1997 and October 31, 1997 was $37,000, $28,000 and $19,000, respectively. Accumulated amortization related to the capitalized software costs at December 31, 1998 and 1997 and October 31, 1997 was $7,052,000, $4,778,000 and $4,363,000, respectively. Amortization of capitalized software costs of $2,274,000, $415,000, $2,951,000 and $1,278,000 are included in cost of revenues for the year ended December 31, 1998, the two months ended December 31, 1997 and the years ended October 31, 1997 and 1996, respectively. Accumulated amortization related to the debenture issue costs at December 31, 1998 and 1997 and October 31, 1997 was $207,000, $282,000 and $221,000, respectively. Accumulated amortization and expense related to the acquired intangibles at December 31, 1998 was $351,000. H. Income Taxes - - ---------------- The provision (benefit) for income taxes includes the following (dollars in thousands):
Year Ended Two Months Ended Year Ended Year Ended December 31, 1998 December 31, 1997 October 31, 1997 October 31, 1996 ----------------- ----------------- ---------------- ---------------- Current: Federal $ -- $ -- $ -- $ (882) State -- -- -- (165) Foreign -- -- -- -- ------------ ------------ ------------ -------------- Total Current $ -- $ -- $ -- $ (1,047) ============ ============ ============ ============== Deferred: Federal $ 5,192 $ 1,179 $ 6,373 $ -- State 1,507 342 972 -- Foreign -- -- -- -- ------------ ------------ ------------ -------------- Total Deferred 6,699 1,521 7,345 -- ------------ ------------ ------------ -------------- Valuation Allowance (6,699) (1,521) (7,345) -- ------------ ------------ ------------ -------------- Net $ -- $ -- $ -- $ (1,047) ============ ============ ============ ==============
The provision (benefit) for income taxes is allocated between continuing and discontinued operations as summarized below (dollars in thousands):
Year Ended Two Months Ended Year Ended Year Ended December 31, 1998 December 31, 1997 October 31, 1997 October 31, 1996 ----------------- ----------------- ---------------- ---------------- Continuing $ -- $ -- $ -- $ (684) Discontinued -- -- -- (363) ------------ ------------ ------------ -------------- Total $ -- $ -- $ -- $ (1,047) ============ ============ ============ ==============
A reconciliation of the Company's effective rate to the U.S. statutory rate is as follows:
Percentage of Pre-Tax Earnings -------------------------------------------------------- Two Year Ended Months Year Ended Year Ended December 31, Ended October 31, October 31, 1998 December 31, 1997 1996 1997 ------------ ------------ ------------ ---------- Federal tax (benefit)/provisions at applicable statutory (34.0%) (34.0%) (35.0%) (34.0%) rates Increases (decreases) in income taxes resulting from: State tax benefit, net of Federal tax effect (6.0) (6.0) -- (6.0) Net changes in current and deferred valuation allowances 40.0 40.0 35.0 31.5 Other, net -- -- -- (2.9) ----- ----- ----- ----- -- -- -- (11.4%) ======== ===== ===== =======
F-13 The components of the deferred tax assets and liabilities are as follows (dollars in thousands):
Year Ended Two Months Ended Year Ended December 31, December 31, October 31, 1998 1997 1997 Current Vacation $ 154 $ 221 $ 136 Other 605 56 16 ------ ----- ------ Total current assets 759 277 152 ------ ----- ------ Noncurrent Deferred gain on sale leaseback $ 91 $ 91 $ 90 Compensation 1,255 1,100 1,100 Depreciation and amortization (107) (78) 86 Net operating loss carryforward 17,210 10,963 9,560 Research and development carryforward 519 519 519 -------- --------- ------- Total non-current assets 18,968 12,751 11,355 Valuation allowance (19,727) (13,028) (11,507) -------- --------- -------- Net deferred tax assets $ -- $ -- $ -- ======== ========= ========
At December 31, 1998, the Company had incurred net operating loss ("NOL") carryforwards for federal income tax purposes of approximately $43.7 million, which expire in the years 2004 through 2018. Research and development carryforwards of $0.5 million expire in the years 1999 through 2005. As certain changes in the Company's ownership occur there is a limitation on the annual amount of such NOL carryforwards and credits which can be utilized. Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 109") requires that a valuation allowance be created and offset against the deferred tax assets if, based on existing facts and circumstances, it is more likely than not that some portion or all of the deferred asset will not be realized. The valuation allowance will be adjusted when the credits are realized or when, in the opinion of management, sufficient additional positive evidence exists regarding the likelihood of their realization. The reductions, if any, will be reflected as a component of income tax expense. The components of loss before income taxes were as follows:
Year Ended Two Months Ended Year Ended Year Ended December 31, 1998 December 31, 1997 October 31, 1997 October 31, 1996 ----------------- ----------------- ---------------- ---------------- Domestic $ (16,679) $ (3,803) $ (20,632) $ (9,040) Foreign (2,341) (133) (1,375) (966) ------ ---- ------ ---- $ (19,020) $ (3,936) $ (22,007) $ (10,006) ========= ============ ========== ==========
I. Accrued Expenses - - -------------------- Accrued expenses at December 31, 1998 and 1997 and October 31, 1997 includes the following amounts (dollars in thousands):
December 31, December 31, October 31, 1998 1997 1997 ---- ---- ---- Wages & benefits $ 1,221 $ 2,013 $ 2,283 Discontinued operations -- -- 1,480 Accrued contract costs and warranty 394 1,151 1,151 Accrued Interest 301 339 225 Other 1,236 603 514 ---------- ---------- ---------- $ 3,152 $ 4,106 $ 5,653 ========== ========== ==========
F-14 J. Segment Information - - ----------------------- The Company is organized and operates as a single segment. The following tabulation details the Company's operations in different geographic areas for the year ended December 31, 1998, the two-month period ended December 31, 1997 and the years ended October 31, 1997 and 1996 (dollars in thousands):
United States Europe Eliminations Consolidated ------------- ------ ------------ ------------ Year Ended December 31, 1998: - - ----------------------------- Revenues from unaffiliated sources $4,019 $ 3,531 $ -- $ 7,550 ------ ------------- ------------- ------------- Identifiable assets at December 31, 1998 $39,350 $ 1,353 $ (6,882) $ 33,821 ------- ------------- ------------- ------------ Two-Months Ended December 31, 1997: - - ----------------------------------- Revenues from unaffiliated sources $ 82 $ 99 $ -- $ 181 ------- ------------- ------------- ------------- Identifiable assets at December 31, 1997 $ 27,568 $ 1,137 $ (4,291) $ 24,413 -------- ------------- ------------- ------------- Year Ended October 31, 1997: - - ---------------------------- Revenues from unaffiliated sources $2,510 $ 2 $ -- $ 2,512 ------ ------------- -------------- ------------ Identifiable assets at October 31, 1997 $24,979 $ 1,205 $ (4,967) $ 21,217 ------- ------------- -------------- ------------ Year Ended October 31, 1996: - - ---------------------------- Revenues from unaffiliated sources $ 1,211 $ 51 $ -- $ 1,262 ------- ------------- ----------- ------------ Identifiable assets at October 31, 1996 $32,739 $ 1,039 $ (3,381) $ 30,397 ------- ------------- ------------- ------------
In fiscal year 1998, one customer accounted for sales amounting to $1,655,000 and four customers accounted for sales of $136,000 in the two-month period ended December 31, 1997. In fiscal year 1997, three customers accounted for sales of $1,221,000 and in fiscal year 1996 one customer accounted for sales of $883,000. K. Commitments and Contingencies - - --------------------------------- Employment Agreements - - --------------------- At December 31, 1998, the Company had employment agreements with six executives. One of these agreements was cancelled pursuant to a subsequent resignation. The remaining agreements provide for up to one year of severance payments in the aggregate of $897,000 plus normal benefits and any amounts due under incentive compensation plans in the event the employee is terminated without cause. In addition, subsequent to year end, the Company entered into similar agreements with four additional executives with aggregate benefits amounting to $238,000. At December 31, 1998, the Company also had agreements with three of these executives providing severance payments if the executive's employment is terminated within three years after a change in control of the Company (i) by the Company for reasons other than death, disability, or cause or (ii) by the executive for good reason. The amount of the severance payment is 2.99 times total average compensation and cost of employee benefits for each of the five years prior to the change in control, subject to the amount deductible by the Company under the Internal Revenue Code. Consulting Agreements - - --------------------- The Company has a consulting agreement providing one of its directors cash compensation in an annual amount of $257,500 plus expenses. In fiscal 1998, the Company terminated this agreement in accordance with the termination provision in the agreement. The agreement provided the consultant the right to receive warrants, subject to prior approval of the Board of Directors and subsequent shareholder approval. The terms of the agreement termination provided that any warrants issued pursuant to this agreement would terminate in the ordinary course, pursuant to their respective terms. Financing Obligation and Leases - - ------------------------------- The Company entered into a sale and leaseback arrangement on October 28, 1994. Under the arrangement, the Company sold its main building in Trenton, New Jersey and agreed to lease it back for a period of 15 years under terms that qualify the arrangement. The Company also has an option to purchase the building at the end of the lease and accordingly, has accounted for this sale leaseback as a financing transaction. The buyer/lessor of the building was a partnership in which two of the partners are former officers and directors of the Company. In addition, a non-interest bearing security deposit of $550,000 was paid at closing which is included in other non-current assets on the balance sheet. Interest is calculated under the effective interest method and depreciation is taken using the straight-line method. Subsequent to October 31, 1997, the Company sub-leased a portion of the building in connection with the sale of the Government Technology Division which is approximately $240,000 per year for five years. The Company's future minimum gross lease payments related to the sale-leaseback arrangement in effect at December 31, 1998 are as follows (dollars in thousands): F-15 Year Ending December 31, - - ----------------------------------------------- ------------------ 1999 $ 569 2000 615 2001 615 2002 615 2003 615 2004 and thereafter 3,963 - - ----------------------------------------------- ------------------ 6,992 Less interest portion (3,577) - - ----------------------------------------------- ------------------ Present value of net minimum payments $ 3,415 - - ----------------------------------------------- ================== At December 31, 1998 and 1997 and October 31, 1997, the gross amount of the building and the related accumulated depreciation recorded under the financing obligation were as follows (dollars in thousands):
December 31, December 31, October 31, 1998 1997 1997 ---- ---- ---- Land and building $ 3,600 $ 3,600 $ 3,600 Less: Accumulated depreciation 500 380 360 --- --- --- $ 3,100 $ 3,220 $ 3,240 ========== ========== ==========
The Company also has several noncancelable operating leases that expire over the next ten years. These leases generally require the Company to pay all executory costs such as maintenance and insurance. Rental expense for operating leases during fiscal years 1998, 1997 and 1996 were $423,000, $307,000 and $259,000 respectively. Rental expense for operating leases for the two-month period ended December 31, 1997 was $51,000. Future minimum lease payments under noncancelable operating leases as of December 31, 1998 are (dollars in thousands): Year Ending December 31, - - ------------------------------------ ------------- 1999 $ 545 2000 386 2001 291 2002 218 2003 139 2004 and thereafter 728 - - ------------------------------------ ------------- Total minimum lease payments $ 2,307 - - ------------------------------------ ============= Legal Proceedings - - ----------------- The Company is involved from time to time in various claims and proceedings including employee claims in the normal course of business, none of which, individually or in the aggregate, in the opinion of management, will have a material adverse effect on the consolidated financial position of the Company. L. Long Term Debt - - ------------------ $ 10 Million Convertible Subordinate Debenture - - ---------------------------------------------- In August 1996 the Company sold $10.0 million 9.01% Convertible Subordinate Debentures due August 31, 2003 in a private offering. Under the terms of the debentures the holder could convert the debentures into the Company's Class A Common Stock at $12.50 per share, 125% of the closing price on August 9, 1996. The Company had the right to call the debentures after February 28, 1998 if the Company's Class A Common Stock price traded between $15.00-$17.50 per share. F-16 On November 10, 1998, the shareholders approved a proposal to authorize the Company to decrease the conversion price from $12.50 to $4.00 per share of Class A Common Stock upon conversion of the debenture. Subsequent to year-end, on March 5, 1999, the holder converted this debenture into 2.5 million shares of Class A Common Stock. $ 5.5 million Convertible Debenture - - ----------------------------------- On May 30, 1997, the Company sold 55 Units ("Units") at $100,000 per Unit, for an aggregate of $5,500,000, to two accredited purchasers ("Purchasers") in a private offering (the "Offering"). Each Unit consisted of (i) an 8% five-year convertible debenture ("Convertible Debenture") in the principal amount of $100,000 convertible into shares of the Company's Class A Common Stock and (ii) a warrant ("Warrant") to acquire 1,800 shares of Class A Common Stock. The number of shares of Class A Common Stock that was issuable upon conversion of the Convertible Debentures was variable. The number of shares were to be calculated at the time of conversion and were to be the lesser of (i) the product obtained by multiplying (x) the lesser of the average of the closing bid prices for the Class A Common Stock for the (A) five or (B) thirty consecutive trading days ending on the trading day immediately preceding the date of determination by (y) a conversion percentage equal to 95% with respect to any conversions occurring prior to February 24, 1998 and 92% with respect to any conversions occurring on or after February 24, 1998 and (ii) $13.50 with respect to any conversions occurring prior to May 30, 1998 or $14.00 with respect to any conversions occurring on or after May 30, 1998. These prices were subsequently revised to $13.05 and $13.53 pursuant to an agreement between the holders and the Company in consideration of the holders' willingness to grant the Company a waiver to sell the GTD. The Convertible Debentures were not convertible prior to December 16, 1997. From December 16, 1997 until February 23, 1998 one-half of the Convertible Debentures could have been converted and after February 23, 1998, the Convertible Debentures were fully convertible. The Warrants may be exercised at any time through May 30, 2002 at an exercise price of $12.25 per share. The Company received net proceeds of approximately $4,950,000 from the sale of the Units after deduction of fees and expenses related to the Offering. During 1998, the $5.5 million Convertible Debentures were fully converted into 1,490,805 shares of Class A Common Stock. M. Other Arrangements - - ---------------------- In May 1997 the Company entered into an agreement whereby it became a minority owner of uPACS(TM) LLC, a limited liability company (the "LLC"). Under the terms of the agreement the Company made a capital contribution to the LLC of its rights to its uPACS(TM) technology which is a system for archiving ultrasound images with networking, communication and off-line measurement capabilities. In exchange for such capital contribution, the Company received a 9% interest in the LLC. A then outside investor, who is currently a principal shareholder of the Company, made an initial capital contribution of $2 million and later made a further capital contribution of $1 million in return for a 91% interest in the LLC. In connection with the formation of the LLC the Company entered into a services and license agreement whereby the Company agreed to complete the development of the uPACS(TM) technology and undertake to market, sell, and distribute systems using the uPACS(TM) technology. The LLC will pay the Company its expenses in connection with such services and the Company will pay royalties to the LLC in connection with the sale of systems using the uPACS technology. At such time as the LLC has distributed to the outside investor an aggregate amount equal to $4.5 million of its net cash flow the Company would become a 63% owner of the LLC and the outside investor would own a 37% interest in the LLC. During the fourth quarter of 1998, the Company determined that it did not have the required resources to devote to both its core manufacturing execution software business and the uPACS(TM) business, and as a result, initiated a search for a potential buyer of the LLC and its technology. At December 31, 1998, the LLC had substantially exhausted its capital resources and, as of the filing date of this annual report on Form 10-K, a buyer had not yet been located. The Company currently intends to fund the LLC operation during the search for a buyer. F-17 N. Redeemable Convertible Preferred Stock - - -------------------------------------------- On December 4, 1997, the Company entered into a securities purchase agreement to sell 19,000 of Series A, $1.00 par value, Convertible Preferred Stock ("Series A Preferred Stock") and common stock warrants for gross proceeds of $19,000,000. The closing of the Series A Preferred Stock and warrants occurred in two tranches. On December 9, 1997, the Company issued 9,375 shares of Series A Preferred Stock and 375,000 warrants. An additional 346,000 warrants were issued to consultants valued at approximately $1,011,000. The transaction resulted in net proceeds of $6,984,000, net of offering costs of $1,380,000. The Company allocated the net proceeds of the Series A Preferred Stocks and warrants based upon their relative fair values resulting in $6,155,000 assigned to the Series A Preferred Stock and $829,000 to the warrants. On December 31, 1997, 9,675 shares of Series A Preferred Stock and 385,000 warrants were issued to the holders of the Series A Preferred Stock, net of cash offering costs of approximately $245,000, resulting in net proceeds of $9,380,000. The company allocated the net proceeds of the Series A Preferred Stock and the warrants based upon their relative fair values resulting in $8,529,000 assigned to the Series A Preferred Stock and $851,000 to the warrants. Such proceeds were received on January 2, 1998, and are recorded as subscriptions receivable at December 31, 1997. The Series A Preferred Stock is convertible at any time into Class A common shares at the Mandatory Redemption Price divided by the lesser of (a) the volume weighted average price for any two trading days selected by the holder in the twenty days prior to conversion, except that the holder may not accept the lowest weighted average price ("variable conversion price"), and (b) $16.25. Such lesser conversion price is limited to 3,040,000 shares. The most beneficial conversion price at issuance was $12.16 which exceeded the market price value of the common stock. Any Series A Preferred Stock unconverted outstanding because of the share limitation can be exchanged at the holder's option for a subordinated 8% promissory note maturing when the Series A Preferred Stock matures. The Company has the right, at any time, to redeem all or any part of the outstanding Series A Preferred Stock or subordinated notes at 130% of their original purchase price. The Series A Preferred Stock has a term of three years from the closing date or December 31, 2000. On the maturity date, the Company must redeem the outstanding preferred stock at its Mandatory Redemption Price, which is the sum of purchase price, accrued but unpaid dividends and other contingent payments as provided under the terms of the preferred stock agreement. The portion of the Mandatory Redemption Price constituting such other contingent payments is payable in cash whereas the purchase price and accrued but unpaid dividends are payable in cash or common stock at the option of the Company. Accordingly, the Company is accreting the carrying value of the preferred stock to the purchase price and recognizing the accretion charges to retained earnings (accumulated deficit) over the three year period from issuance to maturity. The accretion in 1998 aggregated approximately $1,424,000 or approximately $356,000 per quarter. If the Company elects to settle the redemption in common stock, the Mandatory Redemption Price is 1.25 times the purchase price and would result in an additional charge in the period of redemption. Holders of the Series A Preferred Stock have the right to require the Company to purchase their shares for cash upon the occurrence of a Redemption Event. Redemption Events include: a) suspension of trading or delisting from specified stock exchanges of the common stock into which the Series A Preferred Stock is convertible; b) failure by the Company to register, within 180 days, the common stock into which the Series A Preferred Stock is convertible; c) failure to issue common stock upon exercise of conversion rights by a preferred shareholder, or d) failure to pay any amounts due to preferred shareholders. The cash purchase price upon occurrence of a Redemption Event is the greater of a) 1.25 times the Mandatory Redemption Price, or b) the Mandatory Redemption Price divided by the product of the effective conversion price and the market value of the common shares. Any remaining accretion to the actual cash purchase price would be recorded upon a Redemption Event. The Series A Preferred Stock is mandatorily redeemable upon the occurrence of a Redemption Event and, accordingly, is classified as Redeemable Preferred Stock, rather than as a component of Shareholders' Equity (Deficit). The Series A Preferred Stock pays a cumulative dividend of 8.0% per annum in cash or stock at the option of the Company, or as noted above, during any quarter in which the closing bid price for the Class A common stock was less than $8.00 for any ten consecutive trading days. An equivalent payment was payable to any holder of Series A Preferred Stock which was subject during any quarter to a standstill period following a Company underwritten public offering or which was non-convertible because of the limitations on the number of common shares issuable upon conversion. Such dividends and payments were payable only prior to conversion and payable in cash or additional Series A Preferred Stock at the Company's option; however, if the Company elected to pay the dividend in Series A Preferred Shares, the amount of such payment would have been 125% of the cash amount. In 1998, the Company elected to satisfy these dividends with shares of Series A Preferred Stock. F-18 The Series A Preferred Stock has a liquidation preference as to their principal amount and any accrued and unpaid dividends. The Company has reserved 3,800,000 shares of common stock for conversion of Series A Preferred Stock and exercise of the common stock warrants. The holders of the Series A Preferred Stock have the same voting rights as the holders of Class A common stock, calculated as if all outstanding shares of Series A Preferred Stock had been converted into shares of Class A common Stock on the record date for determination of shareholders entitled to vote on the matter presented. The 760,000 warrants issued to the holders of Series A Preferred Stock are exercisable for five years at $16.25 per share. The holder may also elect to pay the exercise price by receiving a reduced number of common shares in lieu of paying the cash exercise price. The warrant agreements also provide for an adjustment of the warrant exercise price upon the issuance of common stock or equivalents with an exercise price below the current market price of the common stock. This adjustment does not apply to the issuance of options under existing plans or shares issued upon the exercise of options, warrants or rights outstanding when the warrants were issued. The adjustment does apply to other transactions where the Board of Directors determines an adjustment is necessary to equitably protect the rights of the holder. The 346,000 warrants issued to consultants are excercisable for five years and have exercise prices ranging from $10.31 to $15.63 and bear similar terms to the warrants issued to the holders of Series A Preferred Stock. On November 10, 1998, the shareholders approved the sale and issuance of Series B Convertible Preferred Stock ("Series B Preferred Shares") (subject to the execution of definitive agreements) and the issuance of Class A Common Stock Purchase Warrants to the Series A Preferred Stockholders that would receive Series B Preferred Shares. The sale and issuance of Series B Preferred Shares would be to the Series A Convertible Preferred Stockholders in the form of an even exchange for Series A Preferred Shares. The terms of the Series B Preferred Shares are similar to the Series A Preferred Shares, except that: (a) the Series B Preferred Shares would have a conversion price of that number of shares determined by dividing the Mandatory Redemption Price by $4.00, as defined above in Series A Preferred Stock, whereas the conversion price of the Series A Preferred Shares is equal to the lesser of (i) $16.25 or (ii) the Weighted Volume Average Price (as defined) of the Class A Common Stock prior to the conversion date limited to 3,040,000 shares; (b) the Series B Preferred Shares, as a result of the conversion price of $4.00, would not provide the holder with the option to receive a subordinated 8% promissory note, as the Series A Preferred Shares provides; and (c) there will be no dividend payment due based on the price of the Class A Common Stock, as the Series A Preferred Shares provides. The issuance of Class A Common Stock Purchase Warrants to the Series A Preferred Stockholders that would receive Series B Preferred Shares provides for the issuance of 80,000 Class A Common Stock Purchase Warrants for each $1 million of principal amount of the Series A Preferred Shares outstanding on November 10, 1998 in addition to certain other Series A Preferred Shares which were converted at $4.00 per share between September 1, 1998 and November 10, 1998. These purchase warrants are four-year warrants exercisable at $3.00, and provide for mandatory exercise upon the occurrence of certain events. During 1998, 5,798 shares of Series A Convertible Preferred Stock were converted to 1,917,806 shares of Class A Common Stock and 1,740 shares of Series A Preferred Stock were issued as dividends resulting in 14,942 shares outstanding at December 31, 1998. Subsequent to year-end, on March 5, 1999, the outstanding Series A Preferred Stock and warrants were exchanged for Series B Preferred Stock. See Note N to the Consolidated Financial Statements. O. Equity Transactions - - ----------------------- Common Stock On April 16, 1998, the shareholders amended the Company's Certificate of Incorporation to modify certain terms of the Class A Common Stock and Class B Common Stock. The modifications to the terms of the Class A and Class B Common Stock increased the exchange ratio for conversion of Class B Common Stock into Class A Common Stock from 1:1 to 1:1.5; changed the voting rights of the Class A Common Stock and the Class B Common Stock with respect to the election of directors so that the directors of the Company will be elected by holders of Class A Common Stock and Class B Common Stock voting together as a single class; made the voting rights of both classes the same so that they have the same voting power; eliminated a separate class vote of Class B Common Stock holders on certain corporate transactions; and changed the dividend restriction so that Class A Common Stock and Class B Common Stock receive the same dividends. F-19 In December 1997, the National Association of Securities Dealers, Inc. ("NASD"), notified the Company that it proposed to de-list the Class B Common Stock from Nasdaq SmallCap Market because the number of holders of Class B Common Stock appeared to have fallen below 300 beneficial owners. The Company proposed the amendments to alleviate certain negative impact of such de-listing of the Class B Common Stock, and the NASD granted to the Company a temporary exception, until May 1, 1998, in order to permit the Company to effect these amendments. Following the close of business on May 1, 1998, the Class B Common Stock was no longer listed on the Nasdaq SmallCap Market. Also on April 16, 1998, the shareholders approved the adoption of three equity plans and an increase in the authorized Class A Common Stock from 22 million shares to 40 million shares. On November 10, 1998, the shareholders approved an increase in the authorized Class A Common Stock from 40 million to 60 million shares and the sale and issuance of up to 6,666,666 shares of Class A Common Stock at a purchase price of $3.00 per share, and Warrants to purchase up to 1,000,000 shares of Class A Common Stock at an exercise price of $3.00 per share. In order to provide additional capital to the Company, the Company agreed to sell 6,666,666 shares of Class A Common Stock at a purchase price of $3.00 per share for aggregate proceeds of $20,000,000. For each $1 million of Class A Common Stock purchased, the purchaser received seven-year warrants to purchase 50,000 shares of Class A Common Stock, exercisable at $3.00 per share; a total of 1,000,000 warrants were, therefore, issued to the purchaser. The placement agent also received warrants to purchase up to 250,000 shares of Class A Common Stock. F-20 P. Earnings Per Share - - --------------------- The following is a reconciliation of the numerators and denominators used to calculate loss per share in the Consolidated Statements of Operations (in thousands, except per share data):
Two Months Year Ended Ended Year Ended Year Ended December 31, December 31, October 31, October 31, 1998 1997 1997 1996 ---- ---- ---- ---- Loss per common share-basic: Net loss $ (19,020) $ (3,936) $ (22,007) $ (8,959) Less: Dividends on Redeemable Convertible Preferred Stock (1,740) -- -- -- Accretion on Redeemable Convertible Preferred Stock (1,424) -- -- -- ------ ----- ------- ----- Net loss to common shareholders (numerator) $ (22,184) $ (3,936) $ (22,007) $ (8,959) ------ ----- ------- ----- Weighted average shares - basic (denominator) 10,618,000 8,258,000 7,895,000 7,743,000 ------ ----- ------- ----- Net loss per common share-basic $ (2.09) $ (0.48) $ (2.79) $ (1.16) ====== ===== ======= ===== Loss per common share-fully diluted: Net loss $ (19,020) $ (3,936) $ (22,007) $ (8,959) Less: Dividends on Redeemable Convertible Preferred Stock (1,740) -- -- -- Accretion on Redeemable Convertible Preferred Stock (1,424) -- -- -- ------ ----- ------- ----- Net loss to common shareholders (numerator) $ (22,184) $ (3,874) $ (22,007) $ (8,959) ------ ----- ------- ----- Weighted average shares 10,618,000 8,258,000 7,895,000 7,743,000 Effect of dilutive options / warrants -- -- -- -- ------ ----- ------- ----- Weighted average shares-fully diluted 10,618,000 8,258,000 7,895,000 7,743,000 (denominator) ------ ----- ------- ----- Net loss per common share-diluted $ (2.09) $ (0.48) $ (2.79) $ (1.16) ====== ===== ======= =====
Stock options, warrants and rights would have an anti-dilutive effect on earnings per share for the years ended December 31, 1998, October 31, 1997 and 1996 and the two month period ended December 31, 1997 and, therefore, were not included in the calculation of fully diluted earnings per share. Q. Stock Option Plans, Warrants and Rights - - ------------------------------------------ The Company's 1990 Incentive Stock Option Plan reserves 484,000 shares of either Class A or Class B Common Stock for purchase upon the exercise of options that may not be granted at less than the fair market value as of the date of grant and that are exercisable over a period not to exceed ten years. There are no further shares available for option under this plan. The Company's 1992 Incentive Stock Option Plan reserves 700,000 shares of Class A Common Stock for purchase upon the exercise of options that may not be granted at less than fair market value as of the date of grant and that are exercisable over a period not to exceed ten years. There are no further shares available for option under this plan. The Company's Discretionary Deferred Compensation Plan reserves 1,150,000 shares of Class A Common Stock for issuance upon the exercise of options. There are no options available for grant under this plan. Options may not be granted at less than fair market value as of the date of grant and are exercisable over a period not to exceed ten years. The Company's 1995 Incentive Stock Option Plan reserves 750,000 shares of Class A Common Stock for issuance upon the exercise of options. Options may not be granted at less than fair market value as of the date of grant and are exercisable over a period not to exceed ten years. There are no options available for grant under this plan. The Company's Base Ten Stock Option Plan reserves 80,000 shares of Class A Common Stock for purchase upon the exercise of options that may not be granted at less than fair market value as of the date of grant and that are exercisable over a period not to exceed ten years. There are no options available for grant under this plan. The Company's 1998 Stock Option and Stock Award Plan reserves 3,000,000 shares of Class A Common Stock for purchase upon the exercise of options. Options may not be granted at less than fair market value as of the date of grant and are exercisable over a period not to exceed ten years. This plan allows for the re-issuance of any canceled or expired options. Approximately 590,000 options remain available for grant under this plan. F-21 A summary of the status of the Company's aforementioned stock option plans as of October 31, 1996 and 1997 and December 31, 1997 and 1998 and changes during the periods ending on those dates is presented below:
Class A Class B ------------------------------------------------------------- Weighted - Weighted - Total Number of Average Number of Average Number of Shares Exercise Price Shares Exercise Price Shares ------ -------------- ------ -------------- ------ Outstanding at October 31, 1995 1,265,394 $ 7.82 4,946 $ 3.00 1,270,340 Granted 307,700 10.79 -- 307,700 Exercised (103,351) 7.06 -- (103,351) Canceled (3,850) 11.15 (3,850) ------ ----- ------ Outstanding at October 31, 1996 1,465,893 $ 8.85 4,946 $ 3.00 1,470,839 ========= ====== ===== ====== ========= Granted 574,650 11.33 -- 574,650 Exercised (78,130) 6.81 -- (78,130) Canceled (57,750) 9.73 -- (57,750) ------- ---- ------- Outstanding at October 31, 1997 1,904,663 $ 9.66 4,946 $ 3.00 1,909,609 ========= ====== ===== ====== ========= Granted -- -- -- -- -- Exercised (50,584) 9.67 -- (50,584) Canceled --------- ------ ----- ------ --------- Outstanding at December 31, 1997 1,854,079 9.65 4,946 $ 3.00 1,859,025 ========= ====== ===== ====== ========= Granted 2,546,100 2.94 -- 2,546,100 Exercised (125,232) 3.84 (4,946) 3.00 (130,178) Canceled (404,324) 9.15 (404,324) --------- ------ ----- ------ --------- Outstanding at December 31, 1998 3,870,623 5.47 -- -- 3,870,623 ========= ====== ===== ====== ========= Exercisable at December 31, 1998 1,942,823 $ 7.62 -- $ -- 1,942,823 ========= ====== ===== ====== =========
The following tables summarizes information about the stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ----------------------------------------------- -------------------------------- Weighted-Average Number Remaining Number Outstanding Contractual Weighted-Average Exercisable at Weighted-Average at December Life (in years) Exercise Price December 31, Exercise Price Range of Exercise Prices 31, 1998 1998 - - -------------------------- --------- -------------- ---------------- -------------- ---------------- $ 2.00 - $ 4.00 1,958,027 9.51 $ 2.21 525,227 $ 2.30 $ 5.13 - $ 8.00 622,620 8.09 $ 5.65 247,620 $ 6.43 $ 8.06 - $10.88 866,976 5.51 $ 9.67 866,976 $ 9.67 $11.13 - $14.50 423,000 7.34 $ 11.69 303,000 $ 11.91
The Company's 1998 Employee Stock Purchase Program authorizes the issuance of up to 1,000,000 shares of Class A Common Stock for purchase by Company employees. Shares are purchased at 85% of the fair market value on standard quarterly purchase dates as defined in the plan. Approximately 993,000 shares were available for issuance and purchase at December 31, 1998. At December 31, 1998, the Company has outstanding 3,264,089 warrants and 754,000 options to consultants and five non-management directors at prices ranging from $2.00 to $18.00, expiring from 1999 to 2008. In 1998, 100,000 warrants and 87,000 options expired. Included in the above are 125,000 warrants issued to a consultant for services related to the promotion and selling of the Company's Stock at an exercise price which was less than the fair market value of the Common Stock at the date of grant. The remaining options and warrants were issued at fair market value at the date of grant. F-22 The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("FAS 123") for its stock options plans for employees. Had compensation cost for these plans been determined under FAS 123, the Company's net loss would have been increased to $20,192,000 and $24,898,000 with a net loss per common share of $2.20 and $3.22 for years ended December 31, 1998 and October 31, 1997, respectively. There were no options granted in the two-month period ended December 31, 1997. For purposes of this calculation, the fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions: expected volatility of between 43-77 percent; weighted average risk free interest rate of between 5.08-6.35 percent; and weighted average expected lives of 1 to 5 years. All options granted to date under the stock option plans for employees have an exercise price equal to the market price of the Company's stock on the grant date. In addition, the Company has recorded charges to earnings for years ended December 31, 1998 and October 31, 1997 of $322,000 and $2,750,000 respectively, representing the value of the options and warrants issued to consultants. The Company also incurred a charge of $543,000 in the two-month period ended December 31, 1997 as a result of extending option expriation dates to terminated employees of the GTD. These charges have been computed using the Black-Scholes option-pricing model. R. Employee Benefit Plan - - ------------------------- The Company has a 401(k) plan which allows all eligible employees to defer up to 17% of their pre-tax income through contributions to the plan. The plan allows for a 1% base annual salary Company matching contribution for each eligible employee. The Company's contribution was $51,000 for fiscal year 1998, $23,000 for the two-month period ended December 31, 1997 and $34,000, and $26,000 in fiscal years 1997 and 1996, respectively. S. Discontinued Operations - - --------------------------- On October 27, 1997 the Company entered into an agreement to sell the GTD to Strategic Technology Systems, Inc. ("Strategic"). The sale between the Company and Strategic was closed on December 31, 1997. Accordingly, the operating results of the Government Technology Division have been segregated from continuing operations and reported as a separate line item on the consolidated statements of operations for all periods presented. Results of operations of the GTD are as follows:
Two Month Ended Year Ended Year Ended December 31, 1997 October 31, 1997 October 31, 1996 ----------------- ---------------- ---------------- Net revenues $ -- $ 9,981 $ 13,329 Cost and expenses 222 14,835 14,238
The net loss on disposal of $1,173,000 for the year ended October 31, 1997 included a provision for estimated losses of the GTD of $1,068,000 through the date of sale. The actual expenses of the GTD through the date of the sale exceeded the provision for estimated losses by $222,000. In accordance with the agreement between the Company and Strategic, and in consideration for the value of the net assets sold, the Company received $3,500,000 in cash, and an unsecured promissory note in a principal amount of $1,975,000. The note has a five year term bearing interest at a rate of 7.5% per annum. Principal payments under the note amortize over a three year period beginning on the second anniversary of the closing which was December 31, 1997. The terms of the note also provide for accelerated payments of principal and interest pending the occurrence of certain events. The Company also received a warrant from Strategic exercisable for that number of shares of the voting common stock as equals 5% of issued and outstanding shares of common stock and common stock equivalents immediately following and giving effect to any initial underwritten public offering by Strategic, with respect to which there can be no assurance. In the event that Strategic is sold, merged or liquidated prior to its initial underwritten public offering, the Company will receive 15% of the gross proceeds of such transaction that are in excess of $7 million, and the warrant described above will be canceled. The Company has subleased to Strategic approximately 30,000 square feet plus allowed the use of 10,000 square feet of common areas for a period of five years at an annual rental of $240,000 for the first three years and $264,000 per year for the last two years of the sublease. F-23 T. Comprehensive Income (Loss) - - ------------------------------- The accumulated balances for each classification of comprehensive income (loss) are as follows (dollars in thousands):
Accumulated Unrealized Other Foreign Gains on Comprehensive Currency Items Securities Income (loss) -------------- ---------- ------------- Balance October 31, 1996 $ (159) $ 49 $ (110) FY 1997 change 9 94 103 Balance October 31, 1997 (150) 143 (7) ========== ========= ============ 1997 Transition Period change (45) (81) (126) Balance December 31, 1997 (195) 62 (133) ========== ========= ============ FY 1998 change (55) (8) (63) Balance December 31, 1998 $ (250) $ 54 $ (196) ========== ========= ============
U. Subsequent Events - - --------------------- Equity Transactions ------------------- Subsequent to year-end, on March 5, 1999, the outstanding Series A Preferred Shares were exchanged for Series B Preferred Shares. See Note N to the Consolidated Financial Statements. As a result, 15,203 shares of Series B Preferred Stock, with a principal amount of $15,203,000 were exchanged for the outstanding shares of Series A Preferred Stock. In addition, 632,000 new Warrants were issued to the Series B Preferred Stockholders, and 720,000 Warrants were issued to replace certain original Warrants issued in December 1997. The Series B Preferred Stock and Warrants will be recorded at their estimated fair value. The Company is in the process of finalizing such fair values and the amounts, if any, of noncash charges or credits. At the November 10, 1998 shareholders' meeting, a proposal was approved to authorize the Company to decrease the conversion price of the $10 million Convertible Subordinated Debenture from $12.50 to $4.00 per share of Class A Common Stock upon conversion of the debenture. On March 5, 1999, the holder converted this $10 million debenture into 2.5 million shares of Class A Common Stock which increased shareholders' equity by approximately $9.6 million including a non-cash charge of approximately $5.5 million. F-24 The following unaudited pro-forma condensed balance sheet represents the effect of the conversion of the $10 million of convertible debentures and write-off of $393,000 in unamortized debenture issuance costs as if it had occurred as of December 31, 1998, the effective date of the definitive agreement as described above. This unaudited pro-forma condensed balance sheet has been prepared for comparative purposes only (dollars in thousands).
Actual as of Pro-forma as December 31, of December 1998 31, 1998 (Audited) (Unaudited) --------- ----------- Total current assets 20,448 20,448 ---------- ----------- Property, plant and equipment, net 5,026 5,026 Note receivable 1,975 1,975 Other assets 6,372 5,979 ---------- ---------- Total Assets $ 33,821 $ 33,428 ========== =========== Current liabilities $ 4,966 $ 4,966 ---------- ----------- Long-term debt 10,000 -- Other long-term liabilities 3,569 3,569 ---------- ----------- Total long-term liabilities 13,569 3,569 ---------- ----------- Redeemable Preferred Stock 12,914 12,914 ---------- ----------- Shareholders' equity 2,372 11,979 ---------- ----------- Total liabilities, redeemable preferred stock and shareholders' equity $ 33,821 $ 33,428 ========== ===========
Almedica Technology Group Acquisition ------------------------------------- On March 16, 1999, the Company's Board of Directors agreed to proceed with negotiations for the acquisition of Almedica Technology Group (Almedica), a wholly owned subsidiary of Almedica International, Inc. in a stock transaction. Almedica develops clinical label and materials management software for the pharmaceutical industry essential to the management of clinical trials. The acquisition, which is subject to the negotiation of final terms and related execution of a definitive agreement, is expected to close before the end of May 1999. Unaudited selected financial information for Almedica for the years ended August 31, 1998 and 1997 are as follows (dollars in thousands):
Year Ended Year Ended August 31, 1998 August 31, 1997 (unaudited) (unaudited) ----------- ----------- Sales $ 1,815 $ 1,604 Net income (560) (578) ----- ----- Total assets 1,195 1,397 Stockholders' equity 145 456 ----- -----
Select Software Tools Acquisition --------------------------------- On March 16, 1999, the Company's Board of Directors approved the commencement of preliminary discussions which could lead to an acquistion of Select Software Tools, plc (NASDAQ: SLCTY) ("Select") in a stock transaction. Also, in connection with these preliminary discussions with Select, the Company agreed to loan Select up to $1.0 million. The acquisition is subject to the negotiation of final terms and execution of a definitive purchase agreement, and the approval of Select stockholders. On March 26, 1999, the Company loaned $700,000 to Select under a promissory note. Unaudited selected financial information for Select for the nine months ended September 30, 1998 and the year ended December 31, 1997 are as follows (dollars in thousands):
Nine Months Ended Year Ended September 30, 1998 December 31, 1997 (unaudited) (unaudited) ----------- ----------- Sales $ 19,439 $ 25,012 Net loss (12,074) (8,080) ------- ------ Total assets 17,618 21,891 Stockholders' equity (246) 11,677 ---- ------
F-25 The Company believes that Select took certain restructuring actions in the second half of 1998 and early 1999 in an effort to significantly reduce its expense base. Select has informed the Company that they have identified certain possible additional cost reductions which are intended to bring Select to break-even by closing or shortly after the date of acquisition by Base Ten. If the Select acquisition occurs, depending on net liabilities of Select, assumed by the Company at the date of acquisition, if any, and on the success of these cost reduction efforts, in bringing Select to net positive cashflow, the Company may need to acquire additional funding in 1999. However, no assurances can be given that the acquisition will occur and, if it does, whether additional required funds would be available to Base Ten when needed. F-26 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 15th day of April, 1999. Base Ten Systems, Inc.
By: THOMAS E. GARDNER By: WILLIAM F. HACKETT By: WILLIAM F. HACKETT - - --------------------------- -------------------------- -------------------------- Thomas E. Gardner William F. Hackett William F. Hackett Chief Executive Officer Chief Financial Officer Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the date indicated. Title Date Directors April 15, 1999 Alexander M. Adelson Thomas E. Gardner Alan S. Poole Carl W. Schafer William Sword By: WILLIAM F. HACKETT - - --------------------------------------------- William F. Hackett, as attorney-in-fact
Exhibit Index Exhibit Number Exhibit Page -------------- ------ ---- 2. (a) Asset Purchase Agreement between Registrant and * (A) Strategic Technology Systems, Inc. dated October 27, 1997, (incorporated by reference to Exhibit 2.1 of Registrant's Current Report on Form 8-K (File No. 0-7100) dated November 17, 1997). (b) Asset Purchase Agreement dated as of February 19, * 1998 by and among Base Ten FlowStream, Inc., Base Ten Systems, Inc. and Consilium, Inc. (incorporated by reference to Exhibit 2(b) to Registrants' Current Report on Form 8-K (File No. 0-7100) dated March 6, 1998). 3. (a) Restated Certificate of Incorporation, as amended, * of Registrant (incorporated by reference to Exhibit 4(a) to Amendment No. 1 to Registrant's Registration Statement on Form S-8 (File No. 2-84451) filed on July 31, 1990). (b) Certificate of Amendment of the Restated * Certificate of Incorporation dated September 1, 1992 (incorporated by reference to Exhibit 4(b)(2) to Amendment No. 3 to Registrant's Registration Statement on Form S-1 (File No. 33-48404) filed on September 3, 1992). (c) Amended By-Laws of the Registrant (incorporated * by reference to Exhibit 4(d)(2) to Registrant's Registration Statement on Form S-8 (File No. 33-60454) filed on April 1, 1993). (d) Certificate of Amendment of Restated Certificate * of Incorporation filed December 2, 1997, (incorporated by reference to Exhibit 99.3 of Registrant's Current Report on Form 8-K (File No. 0-7100) dated October 27, 1997). (e) Amended By-laws of Registrant dated October 13, * 1997 (incorporated by reference to Exhibit 10(ee) to Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1997). (f) Amendment to Certificate of Incorporation filed * on March 31, 1998 (incorporated by reference to Exhibit 3(d) to Registrants' Current Report on Form 8-K (File No. 0-7100) dated April 23, 1998). (g) Amendment to Certificate of Incorporation filed * on April 21, 1998 (incorporated by reference to Exhibit 3(e) to Registrants' Current Report on Form 8-K (File No. 0-7100) dated April 23, 1998). (h) Certificate of Amendment of Certificate of * Incorporation dated June 30, 1998 filed with the Treasurer of the State of new Jersey on July 9, 1998 (incorporated by reference to Exhibit 3(g) to Registrants' Current Report on Form 8-K (File No. 0-7100) dated January 13, 1999). (i) Certificate of Amendment of Certificate of * Incorporation dated September 30, 1998 filed with the Treasurer of the State of New Jersey on October 13, 1998 (incorporated by reference to Exhibit 3(h) to Registrants' Current Report on Form 8-K (File No. 0-7100) dated January 13, 1999). (j) Certificate of Amendment of Certificate of * Incorporation dated November 18, 1998 filed with the Treasurer of the State of new Jersey on November 19, 1998 (incorporated by reference to Exhibit 3(i) to Registrants' Current Report on Form 8-K (File No. 0-7100) dated January 13, 1999). (k) Certificate of Amendment of Certificate of * Incorporation dated January 11, 1999 filed with the Treasurer of the State of new Jersey on January 11, 1999 (incorporated by reference to Exhibit 3(j) to Registrants' Current Report on Form 8-K (File No. 0-7100) dated January 13, 1999). (l) Form of Certificate of Amendment of Restated * Certificate of Incorporation providing for designation, preferences and rights of the Convertible Preferred Shares, Series B (Exhibit A to the Exchange Agreement dated as of December 31, 1998) (incorporated by reference to Exhibit 10(yy) to Registrants' Current Report on Form 8-K (File No. 0-7100) dated January 13, 1999). (m) Certificate of Amendment of Certificate of Incorporation dated March 3, 1999 filed with the Treasurer of the State of New Jersey on March 4, 1999. (n) Certificate of Correction to the Certificate of Amendment of Restated Certificate of Incorporation providing for designation, preferences and rights of the Convertible Preferred Shares, Series B, filed with the Treasurer of the State of New Jersey on March 18, 1999. 4. (a) Purchase Agreement filed as of August 8, 1996 * between the Registrant and Jesse L. Upchurch (incorporated by reference to Exhibit 4 (a) to Registrant's Current Report on Form 8-K (File No. 0-7100) dated August 12, 1996). 10. (a) 1980 Deferred Compensation Agreement between * (A) the Registrant and certain executive officers (incorporated by reference to Exhibit 10.3 to Registrant's Registration Statement on Form S-1 File No. 2-70259 filed on December 16, 1980). (b) 1981 Incentive Stock Option Plan of Registrant, * (A) as amended and restated on January 12, 1990 (incorporated by reference to Exhibit 4(c) to Amendment No. 1 to Registrant's Registration Statement on Form S-8 (File No. 2-84451) filed on July 31, 1990). (c) 1992 Stock Option Plan of Registrant * (A) (incorporated by reference to Exhibit 10(ai) to Amendment No. 3 to Registrant's Registration Statement on Form S-1 (File No. 33-48404) filed on September 3, 1992). (d) Change in Control Agreement dated October 23, * (A) 1991 between Registrant and Myles M. Kranzler (incorporated by reference to Exhibit 10(e) to Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1991). Exhibit Index (Continued) Exhibit Number Exhibit Page -------------- ------- ---- (e) Change in Control Agreement dated October 23, * (A) 1991 between Registrant and James A. Eby (incorporated by reference to Exhibit 10(f) to Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1991). (f) Change in Control Agreement dated October 23, * (A) 1991 between Registrant and Edward J. Klinsport (incorporated by reference to Exhibit 10(f) to Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1991). (g) Employment Agreement dated as of March 26, 1992 * (A) between the Registrant and Myles M. Kranzler (incorporated by reference to Exhibit 28(b) to Registrant's Current Report on Form 8-K (File No. 0-7100) filed on April 10, 1992). (h) Employment Agreement dated as of March 26, 1992 * (A) between the Registrant and James A. Eby (incorporated by reference to Exhibit 28(c) to Registrant's Current Report on Form 8-K (File No. 0-7100) filed on April 10, 1992). (i) Employment Agreement dated as of March 26, 1992 * (A) between the Registrant and Edward J. Klinsport (incorporated by reference to Exhibit 28(d) to Registrant's Current Report on Form 8-K (File No. 0-7100) filed on April 10, 1992). (j) Employment Agreement dated as of March 26, 1992 * (A) between the Registrant and Alan J. Eisenberg (incorporated by reference to Exhibit 28(e) to Registrant's Current Report on Form 8-K (File No. 0-7100) filed on April 10, 1992). (k) Amended Agreement dated July 28, 1992 between the * (A) Registrant and Alexander Adelson (incorporated by reference to Exhibit 10(ar) to the Registrant's Registration Statement on Amendment No. 3. to Form S-2 on Form S-1 (Registration No. 33-48404) filed on September 3, 1992). (l) Modification of Amended Agreement dated January * (A) 11, 1993 between the Registrant and Alexander M. Adelson. (m) Amended Modification of Amended Agreement dated * (A) January 28, 1994 between the Registrant and Alexander M. Adelson. (n) Amended Consulting Agreement made as of February * (A) 24, 1992 between the Registrant and Bruce D. Cowen (incorporated by reference to Exhibit 10(as) to the Registrant's Registration Statement on Amendment No. 3. to Form S-2 on Form S-1 (Registration No. 33-48404) filed on September 3, 1992). (o) Modification of Amendment Agreement dated January * (A) 11, 1993 between the Registrant and Bruce D. Cowen. (p) Consulting Agreement dated March 1, 1994 * (A) between the Registrant and Bruce D. Cowen. (q) Option Agreement dated as of November 9, 1992 * between the Registrant and Donald M. Daniels (incorporated by reference to Exhibit 10(as) to the Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1992). (r) Option Agreement dated as of June 5, 1992 between * the Registrant and Strategic Growth International, Inc. (incorporated by reference to Exhibit 10(at) to the Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1992). (s) Acquisition Agreement dated October 28, 1994 * between the Registrant and CKR Partners, L.L.C. (incorporated by reference to Exhibit 2(a) to Registrant's Current Report on Form 8-K (File No. 0-7100) dated November 11, 1994). (t) Lease dated October 28, 1994 between the * Registrant and CKR Partners, L.L.C. (incorporated by reference to Exhibit 10(b) to Registrant's Current Report on Form 8-K (File No. 0-7100) dated November 11, 1994). (u) Operating Agreement between the Registrant and * Jesse L. Upchurch dated May 1, 1997 (incorporated by reference to Exhibit (u) of Registrant's Current Report on Form 8-K (File No. 0-7100) dated May 1, 1997). (v) License and Services Agreement between the * Registrant and uPACS, L.L.C. dated May 1, 1997, (incorporated by reference to Exhibit 10(v) of Registrant's Current Report Form 8-K (File No. 0-7100) dated May 1, 1997). (w) Compensation Agreement among uPACS, L.L.C., * (A) Andrew Garret, Inc. and Andrew Sycoff dated May 1, 1997, (incorporated by reference to Exhibit 10(w) of Registrant's Current Report on Form 8-K (file No. 0-7100) dated May 1, 1997). (x) Securities Purchase Agreement between the * Registrant and certain purchasers dated May 30, 1997, (incorporated by reference to Exhibit 99.1 of Registrant's Current Report on Form 8-K (File No. 0-7100) dated May 30, 1997). (y) Convertible Term Debenture issued by the * Registrant to certain purchasers dated May 30, 1997, (incorporated by reference to Exhibit 99.2 of Registrant's Current Report on Form 8-K (File No. 0-7100) dated May 30, 1997). (z) Stock Purchase Warrant issued by the Registrant * to certain purchases dated May 30, 1997, (incorporated by reference to Exhibit 99.3 of Registrant's Current Report on Form 8-K (File No. 0-7100) dated May 30, 1997). (aa) Registration Rights Agreement between the * Registrant and certain purchasers dated May 30, 1997, (incorporated by reference to Exhibit 99.4 of Registrant's Current Report on Form 8-K (File No. 0-7100) dated May 30, 1997). (bb) Securities Purchase Agreement between the * Registrant and certain purchasers dated December 4, 1997, (incorporated by reference to Exhibit 99.1 of Registrant's Current Report on Form 8-K (File No. 0-7100) filed dated December 9, 1997). (cc) Registration Rights Agreement between the * Registrant and certain purchasers dated December 4, 1997, (incorporated by reference to Exhibit 99.1 of registrant's Current Report on Form 8-K (File No, 0-7100) dated May 30 filed December 9, 1997). (dd) Common Stock Purchase Warrant issued by * Registrant and certain purchasers dated December 4, 1997 (incorporated by reference to Exhibit 99.4 of Registrant's Current Report Form 8-K (File No. 07100) dated December 9, 1997). (ee) Warrant Agreement between Registrant and * (A) Strategic Growth International dated April 15, 1997 (incorporated by reference to Exhibit 10(ee) to Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1997). (ff) Consultant Agreement between Registrant and RTS * (A) Research Lab, Inc., dated June 9, 1997 (incorporated by reference to Exhibit 10(ff) to Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1997). (gg) Warrant Agreement between Registrant and * (A) Strategic Growth International, Inc. dated June 20, 1997 (incorporated by reference to Exhibit 10(gg) to Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1997). (hh) Option Agreement between Registrant and David C. * (A) Batten dated October 13, 1997 (incorporated by reference to Exhibit 10(hh) to Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1997). (ii) Option Agreement between Registrant and Alan S. * (A) Poole dated October 13, 1997 (incorporated by reference to Exhibit 10(ii) to Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1997). (jj) Employment Agreement between Registrant and * (A) Thomas E. Gardner dated October 17, 1997 (incorporated by reference to Exhibit 10(jj) to Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1997). (kk) Change of Control Agreement between Registrant * (A) and Thomas E. Gardner dated October 17, 1997 (incorporated by reference to Exhibit 10(kk) to Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1997). (ll) Performance-Based Stock Option Agreement between * (A) Registrant and Thomas E. Gardner dated October 17, 1997 (incorporated by reference to Exhibit 10(ll) to Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1997). (mm) Service-Based Stock Option Agreement between * Registrant and Thomas E. Gardner dated October 17, 1997 (incorporated by reference to Exhibit 10(mm) to Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1997). (nn) Separation and Consulting Agreement between * (A) Registrant and Myles M. Kranzler dated October 20, 1997 (incorporated by reference to Exhibit 10(nn) to Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1997). (oo) Omnibus Convertible Term Debenture Holder Waiver * and Consent Regarding Sale of the Government Technology Division and Amendment No. 1 to Convertible term Debenture between Registrant and RGC International Investors, LDC and the Tail Wind Fund, LTD., dated October 20, 1997 (incorporated by reference to Exhibit 10(oo) to Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1997). (pp) Employment Agreement between Registrant and C. * (A) Richard Bagshaw dated November 26, 1997 (incorporated by reference to Exhibit 10(pp) to Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1997). (qq) Promissory Note from Strategic Technology * Systems, Inc., to Registrant dated December 31, 1997 (incorporated by reference to Exhibit 10(gg) to Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1997). (rr) Warrant Agreement between Registrant and * Strategic Technology Systems, Inc., dated December 31, 1997 (incorporated by reference to Exhibit 10(rr) to Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1997). (ss) Transition Agreement between Registrant and * Strategic Technology Systems, Inc., dated December 31, 1997 (incorporated by reference to Exhibit 10(ss) to Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1997). (tt) Sublease between Registrant and Strategic * Technology Systems, Inc., dated December 31, 1997 (incorporated by reference to Exhibit 10(tt) to Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1997). (uu) Fifth Amendment to Lease between Registrant and * CKR PARTNERS, L.L.C., dated December 31, 1997 (incorporated by reference to Exhibit 10(uu) to Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1997). (vv) Consulting Agreement between Registrant and * (A) Edward J. Klinsport dated December 31, 1997 (incorporated by reference to Exhibit 10(vv) to Registrant's Annual Report on Form 10-K (File No. 0-7100) for the fiscal year ended October 31, 1997). (ww) Stock Purchase Agreement dated as of November * 12, 1998 by and between Base Ten Systems, Inc. and Jesse L. Upchurch (incorporated by reference to Exhibit 3(d) to Registrants' Current Report on Form 8-K (File No. 0-7100) dated November 20, 1998). (xx) Exchange Agreement dated as of December 31, 1998 * by and between Base Ten Systems, Inc. and the holders of the outstanding Series A, Convertible Preferred Stock (incorporated by reference to Exhibit 10(xx) to Registrants' Current Report on Form 8-K (File No. 0-7100) dated January 13, 1999). (yy) Form of Certificate of Amendment of Restated * Certificate of Incorporation providing for designation, preferences and rights of the Convertible preferred Shares, Series B (Exhibit A to the Exchange Agreement dated as of December 31, 1998) (incorporated by reference to Exhibit 10(yy) to Registrants' Current Report on Form 8-K (File No. 0-7100) dated January 13, 1999). (zz) Form of Common Stock Purchase Warrant Certificate * (Exhibit B to the Exchange Agreement dated as of December 31, 1998) (incorporated by reference to Exhibit 10(zz) to Registrants' Current Report on Form 8-K (File No. 0-7100) dated January 13, 1999). (aaa) Form of Common Stock Purchase Warrant Certificate * Exhibit C to the Exchange Agreement dated as of December 31, 1998) (incorporated by reference to Exhibit 10(aaa) to Registrants' Current Report on Form 8-K (File No. 0-7100) dated January 13, 1999). (bbb) Irrevocable Consent dated December 22, 1998 by * the holder of the Company's 9.01% Convertible Subordinated Debentures (incorporated by reference to Exhibit 10(bbb) to Registrants' Current Report on Form 8-K (File No. 0-7100) dated January 13, 1999). (ccc) Offer Letter by the Registrant to C. Richard (A) Bagshaw dated November 26, 1997. (ddd) Change in Control Agreement between the (A) Registrant and C. Richard Bagshaw dated January 13, 1998. (eee) Offer Letter by the Registrant to William F. (A) Hackett dated December 8, 1997. (fff) Change in Control Agreement between the (A) Registrant and William F. Hackett dated May 26, 1998. 21. Subsidiaries of the Registrant. 23.1 Consent of Independent Accountants. 23.2 Independent Auditors' Consent. 24.1 Power of Attorney. 27.1 Financial Data Schedule for the fiscal year- ended December 31, 1998, submitted to the Securities and Exchange Commission in electronic format. 27.2 Restated Financial Data Schedule for the two month period from November 1, 1997 to December 31, 1997 submitted to the Securities and Exchange Commission in electronic format.
- - --------------- * Incorporated by reference. (A) A management contract or compensatory plan or arrangement. EX-3.(I) 2 EX. 3(M) - CERTIFICATE OF AMENDMENT BASE TEN SYSTEMS, INC. CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF BASE TEN SYSTEMS, INC. Base Ten Systems, Inc., a corporation (the "Corporation") organized under the laws of the State of New Jersey, to amend its Certificate of Incorporation in accordance with Section 14A:7-2 and 14A:7-18 of Chapter 7 of the New Jersey Business Corporation Act, hereby certifies: FIRST: The name of the Corporation is Base Ten Systems, Inc. SECOND: The Board of Directors of the Corporation, at a meeting of the Board of Directors duly held on March 3, 1999, adopted resolutions (attached as Appendix A hereto) providing for the issuance of 261.4881103516 shares of Convertible Preferred Shares, Series A and the related increase in the authorized number of Convertible Preferred Shares, Series A. THIRD: After giving effect to the issuance of 261.4881103516 shares of the Corporation's Convertible Preferred Shares, Series A, 15,203.66584473 of the Preferred Shares shall be Convertible Preferred Shares, Series A. FOURTH: The Corporation's Certificate of Incorporation is amended as follows: Article 6(d)(A) of the Certificate of Incorporation of the Corporation be amended to read, in its entirety, as follows: "(d) A. Designation and Amount. The shares of this series of Preferred Shares shall be designated as "Convertible Preferred Shares, Series A" and the number of shares constituting such series shall be 15,203.66584473, with a par value of $1.00 per share. Fractional Preferred Shares shall be permitted. The number of Preferred Shares may be increased, subject to and in accordance with the New Jersey Business Corporation Act, without approval of the existing holders of Preferred Shares, solely for the purposes of issuance pursuant to Section C(1) hereof." FIFTH: The action of the Board of Directors in amending Article 6(d)(A) of the Certificate of Incorporation is made pursuant to Section 14A:7-2(2), at a meeting of the Board of Directors duly held on March 3, 1999. SIXTH: This Certificate of Amendment shall become effective upon filing. IN WITNESS WHEREOF, Base Ten Systems, Inc. has caused its duly authorized officer to execute this Certificate on this 3rd day of March, 1999. BASE TEN SYSTEMS, INC. THOMAS E. GARDNER By:_______________________________ Thomas E. Gardner President and Chief Executive Officer Attest: WILLIAM F. HACKETT By:______________________________ William F. Hackett Secretary APPENDIX A RESOLUTIONS 1. WHEREAS, the Board proposes to pay dividends due on March 4, 1999 on the Company's Convertible Preferred Shares, Series A, in Convertible Preferred Shares, Series A, in accordance with Article 6, Section C(1) of the Certificate of Incorporation, which would have the effect of increasing the authorized number of Convertible Preferred Shares, Series A, by 261.4881103516 shares; and WHEREAS, the effect of paying dividends on the Convertible Preferred Shares, Series A, in 261.4881103516 shares thereof and the related increase in the authorized number of Preferred Shares, Series A, is the increase of the authorized number of Convertible Preferred Shares, Series A, from 14,942.17773437 to 15,203.66584473 shares; and be it RESOLVED, that the Board hereby approves the payment of dividends due on March 4, 1999 on the Company's Convertible Preferred Shares, Series A, payable in Convertible Preferred Shares, Series A, in accordance with Article 6, Section C(1) of the Certificate of Incorporation, and the increase in the authorized number of Convertible Preferred Shares, Series A, by 261.4881103516 shares; and be it FURTHER RESOLVED, that Article 6(d)(A) of the Certificate of Incorporation of the Company be amended to read, in its entirety, as follows: "(d) A. Designation and Amount. The shares of this series of Preferred Shares shall be designated as "Convertible Preferred Shares, Series A" and the number of shares constituting such series shall be 15,203.66584473, with a par value of $1.00 per share. Fractional Preferred Shares shall be permitted. The number of Preferred Shares may be increased, subject to and in accordance with the New Jersey Business Corporation Act, without approval of the existing holders of Preferred Shares, solely for the purposes of issuance pursuant to Section C(1) hereof." 2. RESOLVED, that the Board hereby authorizes, directs and empowers each of Thomas E. Gardner and William F. Hackett, to act individually or jointly on behalf of the Company to execute and deliver the amendment to the Certificate of Incorporation of the Company to effect the foregoing resolutions. EX-3.(I) 3 EX. 3(N) - CERTIFICATE OF CORRECTION CERTIFICATE OF CORRECTION OF CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION PROVIDING FOR DESIGNATION, PREFERENCES AND RIGHTS OF THE CONVERTIBLE PREFERRED SHARES, SERIES B (Par Value $1.00 Per Share) of BASE TEN SYSTEMS, INC. Base Ten Systems, Inc. (the "Corporation"), desiring to correct the Certificate of Amendment of Restated Certificate of Incorporation Providing for Designation, Preferences and Rights of the Convertible Preferred Shares, Series B of the Corporation (the "Certificate of Amendment") filed on March 4, 1999, pursuant to Section 14A:1-6(5) of the New Jersey Business Corporation Act hereby certifies: FIRST: The name of the Corporation is Base Ten Systems, Inc. SECOND: The date of the Exchange Agreement set forth in the Second Article, Section B--Definitions, Definition of "Exchange Agreement," of the Corporation's Certificate of Amendment was incomplete as it read "December XX, 1998." THIRD: The date of the Exchange Agreement set forth in the Second Article, Section B--Definitions, Definition of "Exchange Agreement," of the Corporation's Certificate of Amendment is corrected to read "December 31, 1998." IN WITNESS WHEREOF, the Corporation has caused its duly authorized officer to execute this Certificate on this 16th day of March, 1999. BASE TEN SYSTEMS, INC. WILLIAM F. HACKETT By:_________________________ William F. Hackett Senior Vice President EX-10 4 EX. 10 (CCC) - OFFER LETTER TO C. RICHARD BAGSHAW November 26, 1997 Mr. C. Richard Bagshaw 1470 Sand Hill Road, Apt. 310 Palo Alto, California 94304 Dear Rick: It is a pleasure to extend to you an offer to join Base Ten Systems, Inc. as Executive Vice President effective December 1, 1997. As you know, Base Ten is in the process of completing a strategic shift from weapons control systems for the defense industry to manufacturing execution systems (MES) software for regulated industries, especially pharmaceutical manufacturers. Your recent experience as President of Roche-Syntex Pharmaceuticals in Puerto Rico and your many years of operations, marketing and general management experience lead us to believe that you will be quite successful in your new role and responsibilities. Your initial compensation will be as follows: 1. Base Salary - Your base salary will be at the annual rate of $180,000 earned and paid bi-weekly, in accordance with Base Ten's normal pay policy. You will be eligible for an annual salary review. Salary action will be based on merit and performance. 2. Bonus - You will be eligible for a bonus equaling up to 40% of your base salary. The amount of your bonus will be determined by management based on your meeting agreed upon performance targets and on the overall performance of the Company. This bonus will be paid within 120 days after the end of each fiscal year. 3. Stock Option - We will make best efforts to secure the needed approvals of the shareholders and of the Board of Directors to authorize additional shares of Base Ten Class A Common Stock for option purposes and to grant you an option to purchase 50,000 shares from this proposed authorization. Your purchase price per share under this option grant would be at the NASDAQ closing price on the day that your option is granted. Assuming it is granted, this option will vest 20% on each of the first five anniversaries from the date of the grant. You will be eligible from time to time for future grants at the discretion of the Board of Directors. 4. Change of Control Agreement - You will be provided with a change of control agreement. Should there be a change of control as defined in the Agreement, your stock options will vest 100% on the date of change of control. Should your employment subsequently be terminated for convenience following a change of control as defined in the Agreement you will receive a cash payment in the amount of 2.99 times your base salary. The change of control agreement is controlling in these instances. 5. Severance Protection - In accordance with Base Ten policy you can be separated from the Company at any time for either cause or convenience. Should your employment be terminated by the Company for convenience you will receive salary continuation for a period of twelve months. Should your employment be terminated by the Company for cause there will be no severance pay. 6. Benefits - You will be entitled to the standard package of Base Ten benefits offered to U. S. exempt employees including eight paid holidays and three weeks vacation. 7. Relocation Allowance - You will be entitled to a relocation allowance not to exceed $10,000. This will include up to three months of temporary housing at a rate not to exceed $1,500 per month, and packing and shipment of your household goods to the Trenton area. Actual expenditures will be reimbursed. This offer is contingent upon the fact that there is nothing outstanding, including any restrictive nondisclosure/noncompetition agreements with or any obligations to any parties which would prohibit your ability to function in full as Executive Vice President, and, upon board approval, as an officer of the Company. The terms of this letter of offer are governed by the laws of the State of New Jersey and shall be subject to periodic review. Employment with the Company is as defined and governed by Company policies and procedures. Please confirm your acceptance to this offer by signing both this and the enclosed Agreement with Respect to Inventions, Disclosures and Competition. Originals should be returned to the attention of Jo Ann Fechter, Personnel Manager. You may retain the copies for your files. At Base Ten, Rick, we are exceptionally excited about our growth prospects. We hope that you choose to accept our offer and look forward to your joining us early in December. Sincerely, RICHARD J. FARRELLY C. RICHARD BAGSHAW - - ------------------- -------------------------- Richard J. Farrelly C. Richard Bagshaw Sr. Vice President, Planning and Human Resources cc: T. E. Gardner Board of Directors EX-10 5 EX. 10 (DDD) - BAGSHAW CHANGE IN CONTROL AGREEMENT CHANGE IN CONTROL AGREEMENT THIS AMENDED AND RESTATED AGREEMENT dated January 13, 1998, by and between Base Ten Systems, Inc., a New Jersey corporation (together with any successor, the "Company"), and C. Richard Bagshaw, residing at 6134 Bramble Court, Lawrenceville, NJ 08648, (the "Executive"). W I T N E S S E T H: WHEREAS, should the Company receive a proposal from or engage in discussions with a third person concerning a possible business combination with or the acquisition of a substantial portion of voting securities of the Company, the Board of Directors of the Company (the "Board") has deemed it imperative that it and the Company be able to rely on the Executive to continue to serve in his position and that the Board and the Company be able to rely upon his advice as being in the best interests of the Company and its shareholders without concern that the Executive might be distracted by the personal uncertainties and risks that such a proposal or discussions might otherwise create; and WHEREAS, the Company desires to enhance executive morale and its ability to retain existing management; and WHEREAS, the Company desires to reward the Executive for his service to the Company or one or more of its subsidiary corporations (each together with any successor, a "Subsidiary") should his service be terminated under circumstances hereinafter described; and WHEREAS, the Board therefore considers it in the best interests of the Company and its shareholders for the Company to enter into Change in Control Agreements, in form similar to this Agreement, with certain key executive officers of the Company; and WHEREAS, the Executive is presently a key executive with whom the Company has been authorized by the Board to enter into this Agreement; WHEREAS, as of the date of this Agreement, the specialized knowledge and skills of the Executive will be particularly needed by the Company as the Company continues to expand its medical technology business, and stability at the top management level is and will be critically important to the ultimate success of the Company; and WHEREAS, in order to provide an incentive to members of top management not to seek and consider opportunities outside of the Company, which would substantially impede the continued expansion of the Company's medical technology business, while at the same time continuing to engage in its historic business, the Company's independent directors have determined it to be in the best interests of the Company to revise and amend this Agreement in order to make it consistent with the purposes underlying the original entry of this Agreement; NOW, THEREFORE, to assure the Company of the Executive's continued dedication and the availability of his advice and counsel in the event of any such proposal, to induce the Executive to remain in the employ of the Company or a Subsidiary, and to reward the Executive for his valuable, dedicated service to the Company or a Subsidiary should his service be terminated under circumstances hereinafter described, and for other good and valuable consideration, the receipt and adequacy whereof each party acknowledges, the Company and the Executive agree as follows: 1. OPERATION, EFFECTIVE DATE, AND TERM OF AGREEMENT. (a) This Agreement shall commence on the date hereof and continue in effect through December 31, 2000; provided, however, that commencing on January 1, 1999 and each succeeding January 1 thereafter, the term of this Agreement shall be extended automatically for one additional year (so that at all times the remaining term hereof shall not be less than two (2) years) unless not later than the September 30 preceding such automatic extension date the Company shall have given notice that it does not wish to extend this Agreement. (b) This Agreement is effective and binding on both parties as of the date hereof. Notwithstanding its present effectiveness, the provisions of paragraphs 3 and 4 of this Agreement shall become operative only when, as and if there has been a "Change in Control of the Company." For purposes of this Agreement, a "Change in Control of the Company" shall be deemed to have occurred if (X) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), or persons "acting in concert" (which for purposes of this Agreement shall include two or more persons voting together on a consistent basis pursuant to an agreement or understanding between them), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company and other than a person engaging in a transaction of the type described in clause (Z) of this subsection but which does not constitute a change in control under such clause, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing forty percent (40%) or more of the combined voting power of the Company's then outstanding securities; or (Y) individuals who, as of the date of this Amended and Restated Agreement, constitute the Board and any new director ("New Director") whose election by the Board, or nomination for election by the Company shareholders, was approved by a vote of at least seventy-five percent (75%) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved ("Continuing Members"), cease for any reason to constitute a majority thereof (provided that, for purposes of this clause (Y), the term "New Director" shall exclude (i) a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clauses (X) or (Z) of this subsection, and (ii) an individual whose initial assumption of office as a director is in connection with any actual or threatened contest related to the election of any directors to the Board); or (Z) the shareholders of the Company approve or, if no shareholder approval is required or obtained, the Company or a Subsidiary completes a merger, consolidation or similar transaction of the Company or a Subsidiary with or into any other corporation, or a binding share exchange involving the Company's securities, other than any such transaction which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least seventy-five percent (75%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such transaction, or the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets (excluding, for this purpose, the sale of the Company's Government Technology division). 2. EMPLOYMENT OF EXECUTIVE. Nothing herein shall affect any right which the Executive or the Company or a Subsidiary may otherwise have to terminate the Executive's employment by the Company or a Subsidiary at any time in any lawful manner, subject always to the Company's providing to the Executive the payments and benefits specified in paragraphs 3 and 4 of this Agreement to the extent hereinbelow provided. In the event any person commences a tender or exchange offer, circulates a proxy statement to the Company's shareholders or takes other steps designed to effect a Change in Control of the Company as defined in paragraph 1 of this Agreement, the Executive agrees that, subject to the provisions of Section 5(a)(iii), (c) and (j) of the Employment Agreement, he will not voluntarily leave the employ of the Company or a Subsidiary, and will continue to perform his regular duties and to render the services specified in the recitals of this Agreement, until such person has abandoned or terminated his efforts to effect a Change in Control of the Company or until a Change in Control of the Company has occurred. Should the Executive voluntarily terminate his employment before any such effort to effect a Change in Control of the Company has commenced, or after any such effort has been abandoned or terminated without effecting a Change in Control of the Company and no such effort is then in process, this Agreement shall lapse and be of no further force or effect. 3. TERMINATION FOLLOWING CHANGE IN CONTROL. (a) If any of the events described in paragraph 1 hereof constituting a Change in Control of the Company shall have occurred, the Executive shall be entitled to the benefits provided in paragraph 4 hereof upon the termination of his employment within the applicable period set forth in paragraph 4 hereof unless such termination is (i) due to the Executive's death; or (ii) by the Company or a Subsidiary by reason of the Executive's Disability or for Cause; or (iii) by the Executive other than for Good Reason. (b) If following a Change in Control of the Company the Executive's employment is terminated by reason of his death or Disability, the Executive shall be entitled to death or long-term disability benefits, as the case may be, from the Company no less favorable than the maximum benefits to which he would have been entitled had the death or termination for Disability occurred during the six month period prior to the Change in Control of the Company. If prior to any such termination for Disability, the Executive fails to perform his duties as a result of incapacity due to physical or mental illness, he shall continue to receive his Salary less any benefits as may be available to him under the Company's or Subsidiary's disability plans until his employment is terminated for Disability. (c) If the Executive's employment shall be terminated by the Company or a Subsidiary for Cause or by the Executive other than for Good Reason, the Company shall pay to the Executive his full Salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (d) For purposes of this Agreement: (i) "Disability" shall mean the Executive's incapacity due to physical or mental illness such that the Executive shall have become qualified to receive benefits under the Company's or Subsidiary's long-term disability plans or any equivalent coverage required to be provided to the Executive pursuant to any other plan or agreement, whichever is applicable. (ii) "Cause" shall mean: (A) the conviction of the Executive for a felony, or the willful commission by the Executive of a criminal or other act that in the judgment of the Board causes or will probably cause substantial economic damage to the Company or a Subsidiary or substantial injury to the business reputation of the Company or a Subsidiary; (B) the commission by the Executive of an act of fraud in the performance of such Executive's duties on behalf of the Company or a Subsidiary that causes or will probably cause economic damage to the Company or a Subsidiary; or (C) the continuing willful failure of the Executive to perform the duties of such Executive to the Company or a Subsidiary (other than any such failure resulting from the Executive's incapacity due to physical or mental illness) after written notice thereof (specifying the particulars thereof in reasonable detail) and a reasonable opportunity to be heard and cure such failure are given to the Executive by the Compensation Committee of the Board with the approval thereof by a majority of the Continuing Directors. For purposes of this subparagraph (d)(ii), no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interests of the Company or a Subsidiary. (iii) "Good Reason" shall mean: (A) The assignment by the Company or a Subsidiary to the Executive of duties without the Executive's express written consent, which (i) are materially different or require travel significantly more time consuming or extensive than the Executive's duties or business travel obligations measured from the point in time one (1) year prior to the Change in Control of the Company, or (ii) result in either a significant reduction in the Executive's authority and responsibility as a senior corporate executive of the Company or a Subsidiary when compared to the highest level of authority and responsibility assigned to the Executive at any time during the one (1) year period prior to the Change in Control of the Company, or, (iii) without the Executive's express written consent, the removal of the Executive from, or any failure to reappoint or reelect the Executive to, the highest title held since the date one (1) year before the Change in Control of the Company, except in connection with a termination of the Executive's employment by the Company or a Subsidiary for Cause, or by reason of the Executive' death or Disability; (B) A reduction by the Company or a Subsidiary of the Executive's Salary, or the failure to grant increases in the Executive's Salary on a basis at least substantially comparable to those granted to other executives of the Company or a Subsidiary of comparable title, salary and performance ratings made in good faith; (C) The relocation of the Company's principal executive offices (or in the case of an employee of a Subsidiary, the principal executive offices of such Subsidiary) to a location outside the State of New Jersey, or the Company's requiring the Executive to be based anywhere other than the Company's principal executive offices (or in the case of an employee of a Subsidiary, the principal executive officer of such Subsidiary) except for required travel on the Company's or a Subsidiary's business to an extent substantially consistent with the Executive's business travel obligations measured from the point in time one (1) year prior to the Change in Control of the Company, or in the event of any relocation of the Executive with the Executive's express written consent, the failure by the Company or a Subsidiary to pay (or reimburse the Executive for) all reasonable moving expenses by the Executive relating to a change of principal residence in connection with such relocation and to indemnify the Executive against any loss realized in the sale of the Executive's principal residence in connection with any such change of residence, all to the effect that the Executive shall incur no loss upon such sale on an after tax basis; (D) The failure by the Company or a Subsidiary to continue to provide the Executive with substantially the same welfare benefits (which for purposes of this Agreement shall mean benefits under all welfare plans as that term is defined in Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended), and perquisites, including participation on a comparable basis in the Company's or a Subsidiary's stock option plan, incentive bonus plan and any other plan in which executives of the Company or a subsidiary of comparable title and salary participate and as were provided to the Executive measured from the point in time one (1) year prior to such Change in Control of the Company, or with a package of welfare benefits and perquisites that is substantially comparable in all material respects to such welfare benefits and perquisites; or (E) The failure of the Company to obtain the express written assumption of and agreement to perform this Agreement by any successor as contemplated in subparagraph 5(d) hereof. (iv) "Dispute" shall mean (i) in the case of termination of employment of the Executive with the Company or a Subsidiary by the Company or a Subsidiary for Disability or Cause, that the Executive challenges the existence of Disability or Cause and (ii) in the case of termination of employment of the Executive with the Company or a Subsidiary by the Executive for Good Reason, that the Company or the Subsidiary challenges the existence of Good Reason. (v) "Salary" shall mean the Executive's average annual compensation reported on Form W-2. (vi) "Incentive Compensation" in any year shall mean the amount the Executive has elected to defer in such year pursuant to any plan, arrangement or contract providing for the deferral of compensation. (e) Any purported termination of employment by the Company or a Subsidiary by reason of the Executive's Disability or for Cause, or by the Executive for Good Reason, shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice given by the Executive or the Company or a Subsidiary, as the case may be, which shall indicate the specific basis for termination and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for determination of any payments under this Agreement. The Executive shall not be entitled to give a Notice of Termination that the Executive is terminating his employment with the Company or a Subsidiary for Good Reason more than six (6) months following the later to occur of (i) the Change in Control and (ii) the occurrence of the event alleged to constitute Good Reason. The Executive's actual employment by the Company or a Subsidiary shall cease on the Date of Termination specified in the Notice of Termination, even though such Date of Termination for all other purposes of this Agreement may be extended in the manner contemplated in the second sentence of Paragraph 3(f). (f) For purposes of this Agreement, "Date of Termination" shall mean the date specified in the Notice of Termination, which shall be not more than ninety (90) days after such Notice of Termination is given, as such date may be modified pursuant to the next sentence. If within thirty (30) days after any Notice of Termination is given, the party who receives such Notice of Termination notifies the other party that a Dispute (as heretofore defined) exists, the Date of Termination shall be the date on which the Dispute is finally determined, either by mutual written agreement of the parties, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected); provided that the Date of Termination shall be extended by a notice of Dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such Dispute with reasonable diligence and provided further that pending the resolution of any such Dispute, the Company or a Subsidiary shall continue to pay the Executive the same Salary and to provide the Executive with the same or substantially comparable welfare benefits and perquisites that the Executive was paid and provided as of a date one (1) year prior to the Change in Control of the Company. Should a Dispute ultimately be determined in favor of the Company or a Subsidiary, then all sums paid by the Company or a Subsidiary to the Executive from the date of termination specified in the Notice of Termination until final resolution of the Dispute pursuant to this paragraph shall be repaid promptly by the Executive to the Company or a Subsidiary, with interest at the prime rate generally prevailing from time to time among major New York City banks and all options, rights and stock awards granted to the Executive during such period shall be cancelled or returned to the Company or Subsidiary. The Executive shall not be obligated to pay to the Company or a Subsidiary the cost of providing the Executive with welfare benefits and perquisites for such period unless the final judgment, order or decree of a court or other body resolving the Dispute determines that the Executive acted in bad faith in giving a notice of Dispute. Should a Dispute ultimately be determined in favor of the Executive or be settled by mutual agreement between the Executive and the Company, then the Executive shall be entitled to retain all sums paid to the Executive under this subparagraph (f) for the period pending resolution of the Dispute and shall be entitled to receive, in addition, the payments and other benefits to the extent provided for in paragraph 4 hereof to the extent not previously paid hereunder. 4. PAYMENTS UPON TERMINATION. If within three years after a Change in Control of the Company (or if within nine (9) months prior to a Change in Control if effected in connection with such Change in Control), the Company or a Subsidiary shall terminate the Executive's employment other than by reason of the Executive's death, Disability or for Cause or the Executive shall terminate his employment for Good Reason then, (a) The Company or a Subsidiary will pay on the Date of Termination to the Executive as compensation for services rendered on or before the Executive's Date of Termination, a lump sum cash amount (subject to any applicable payroll or taxes required to be withheld computed at the rate for supplemental payments) equal to (i) 2.99 times the sum of the average for each of the five fiscal years of the Company ending before the day on which the Change in Control of the Company occurs of the Executive's Salary, his Incentive Compensation and the annual cost to the Company of all hospital, medical and dental insurance, life insurance, disability insurance and other welfare or benefit plan provided to the Executive minus (ii) the cost to the Company of the insurance required under subparagraph 4(b) hereof; (b) For a period of three years following the Date of Termination, the Company shall provide, at Company expense, the Executive and the Executive's spouse with full hospital, medical and dental insurance with substantially the same coverage and benefits as were provided to the Executive immediately prior to the Change in Control of the Company; and (c) In event that any payment or benefit received or to be received by the Executive pursuant to this Agreement in connection with a Change in Control of the Company or the termination of the Executive's employment (collectively with all payments and benefits hereunder, "Total Payments") would not be deductible in whole or in part by the Company as the result of Section 280G of the Internal Revenue Code of 1986, as amended and the regulations thereunder (the "Code"), the payments and benefits hereunder shall be reduced until no portion of the Total Payments is not deductible by reducing to the extent necessary the payment under subparagraph (a) hereof. For purposes of this limitation (i) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the date of payment shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Executive and acceptable to the Company's independent auditors the Executive is not likely to constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, and (iii) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. 5. GENERAL. (a) The Executive shall retain in confidence any proprietary or other confidential information known to him concerning the Company and its business (including the Company's Subsidiaries and their businesses) so long as such information is not publicly disclosed and disclosure is not required by an order of any governmental body or court. (b) If litigation or other proceedings shall be brought to enforce or interpret any provision contained herein, or in connection with any tax audit to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provided hereunder, the Company shall indemnify the Executive for his reasonable attorney's fees and disbursements incurred in connection therewith (which indemnification shall be made at regular intervals during the course of such litigation, not less frequently than every three (3) months) and pay prejudgment interest on any money judgment obtained by the Executive calculated at the prime rate of interest generally prevailing from time to time among major New York City banks from the date that payment should have been made under the Agreement; provided that if the Executive initiated the proceedings, the Executive shall not have been found by the court or other fact finder to have acted in bad faith in initiating such litigation or other proceeding, which finding must be final without further rights of appeal. (c) The Company's obligation to pay the Executive the compensation and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, any setoff, counterclaim, recoupment, defense or other right which the Company may have against the Executive or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. Except as expressly provided herein, the Company waives all rights which it may now have or may hereafter have conferred upon it, by statute or otherwise, to terminate, cancel or rescind this Agreement in whole or in part. Except as provided in paragraph 3(f) herein, each and every payment made hereunder by the Company shall be final and the Company will not seek to recover for any reason all or any part of such payment from the Executive or any person entitled thereto. The Executive shall not be required to mitigate the amount of any payment or other benefit provided for in this Agreement by seeking other employment or otherwise. (d) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company (excluding, for this purpose, the sale of the Company's Government Technology division), by written agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this paragraph 5 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (e) This Agreement shall inure to the benefit of, and be enforceable by, the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If the Executive should die while any amounts would still be payable to the Executive hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee or other designee or, if there be no such designee, to the Executive's estate. The obligations of the Executive hereunder shall not be assignable by the Executive. (f) Nothing in this Agreement shall be deemed to entitle the Executive to continued employment with the Company or a Subsidiary, and the rights of the Company or a Subsidiary to terminate the employment of the Executive shall continue as fully as though this Agreement were not in effect. 6. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: C. Richard Bagshaw 6134 Bramble Court Lawrenceville, NJ 08648 If to the Company: Base Ten Systems, Inc. One Electronics Drive P. O. Box 3151 Trenton, New Jersey 08619 Attention: Secretary 7. MISCELLANEOUS. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing, signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No assurances or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement or the Employment Agreement. However, this Agreement is in addition to, and not in lieu of, any other plan providing for payments to or benefits for the Executive or any agreement now existing, or which hereafter may be entered into, between the Company and the Executive. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New Jersey. 8. FINANCING. All amounts due and benefits provided under this Agreement shall constitute general obligations of the Company in accordance with the terms of this Agreement. The Executive shall have only an unsecured right to payment thereof out of the general assets of the Company. Notwithstanding the foregoing, the Company may, by agreement with one or more trustees to be selected by the Company, create a trust on such terms as the Company shall determine to make payments to the Executive in accordance with the terms of this Agreement. 9. VALIDITY. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above. BASE TEN SYSTEMS, INC. T.E. GARDNER By:---------------------------------- Chairman of the Board and Chief Executive Officer C. RICHARD BRAGSHAW ----------------------------------- (EXECUTIVE) EX-10 6 EX. 10 (EEE) - OFFER LETTER TO WILLIAM F. HACKETT December 8, 1997 Mr. William F. Hackett 34 Wilshire Drive Belle mead, NJ 08502 Dear Bill: It is a pleasure to extend to you an offer to join Base Ten Systems, Inc. as Senior Vice President, Finance and Administration effective December 10, 1997. As you know, Base Ten is in the process of completing a strategic shift from weapons control systems for the defense industry to manufacturing execution systems (MES) software for regulated industries, especially pharmaceutical manufacturers. Your recent experience with Bloomberg Financial Markets and your many years of financial, marketing, planning and general management experience lead us to believe that you will be quite successful in your new role and responsibilities. Your initial compensation will be as follows: 1. Base Salary - Your base salary will be at the annual rate of $160,000 earned and paid bi-weekly, in accordance with Base Ten's normal pay policy. You will be eligible for a salary review in July 1998 and for an annual salary review thereafter. Salary action will be based on merit and performance. 2. Bonus - You will be eligible for a bonus equaling up to 40% of your base salary. The amount of your bonus will be determined by management based on your meeting agreed upon performance targets and on the overall performance of the Company. This bonus will be paid within 120 days after the end of each fiscal year. 3. Stock Option - We will make best efforts to secure the needed approvals of the shareholders and of the Board of Directors to authorize additional shares of Base Ten Class A Common Stock for option purposes and to grant you an option to purchase 50,000 shares from this proposed authorization. Your purchase price per share under this option grant would be at the NASDAQ closing price on the day that your option is granted. Assuming it is granted, this option will vest 20,000 shares immediately and 10,000 shares on each of the first three anniversaries from the date of the grant. You will be eligible from time to time for future grants at the discretion of the Board of Directors. 4. Severance Protection - In accordance with Base Ten policy you can be separated from the Company at any time for either cause or convenience. Should your employment be terminated by the Company for convenience you will receive salary continuation, including benefits, for a period of six months. Should your employment be terminated by the Company for cause there will be no severance pay. 5. Benefits - You will be entitled to the standard package of Base Ten benefits offered to U. S. exempt employees including eight paid holidays and three weeks vacation. This offer is contingent upon the fact that there is nothing outstanding, including any restrictive nondisclosure/noncompetition agreements with or any obligations to any parties which would prohibit your ability to function in full as Senior Vice President, Finance and Administration and, upon board approval, as an officer of the Company. The terms of this letter of offer are governed by the laws of the State of New Jersey and shall be subject to periodic review. Employment with the Company is as defined and governed by Company policies and procedures. Please confirm your acceptance to this offer by signing both this and the enclosed Agreement with Respect to Inventions, Disclosures and Competition. Originals should be returned to the attention of Jo Ann Fechter, Personnel Manager. You may retain the copies for your files. At Base Ten, Bill, we are exceptionally excited about our growth prospects. We hope that you choose to accept our offer and look forward to your joining us early in December. Sincerely, RICHARD J. FARRELLY - - ---------------------------- Richard J. Farrelly Sr. Vice President, Planning and Human Resources cc: T. E. Gardner Board of Directors ACCEPTED: WILLIAM F. HACKETT - - --------------------------- William F. Hackett December 10, 1997 EX-10 7 EX. 10 (FFF) - HACKETT CHANGE IN CONTROL AGREEMENT CHANGE IN CONTROL AGREEMENT THIS AMENDED AND RESTATED AGREEMENT dated May 26, 1998, by and between Base Ten Systems, Inc., a New Jersey corporation (together with any successor, the "Company"), and William F. Hackett, residing at 34 Wilshire Dr., Belle Mead, NJ 08502, (the "Executive"). W I T N E S S E T H: WHEREAS, should the Company receive a proposal from or engage in discussions with a third person concerning a possible business combination with or the acquisition of a substantial portion of voting securities of the Company, the Board of Directors of the Company (the "Board") has deemed it imperative that it and the Company be able to rely on the Executive to continue to serve in his position and that the Board and the Company be able to rely upon his advice as being in the best interests of the Company and its shareholders without concern that the Executive might be distracted by the personal uncertainties and risks that such a proposal or discussions might otherwise create; and WHEREAS, the Company desires to enhance executive morale and its ability to retain existing management; and WHEREAS, the Company desires to reward the Executive for his service to the Company or one or more of its subsidiary corporations (each together with any successor, a "Subsidiary") should his service be terminated under circumstances hereinafter described; and WHEREAS, the Board therefore considers it in the best interests of the Company and its shareholders for the Company to enter into Change in Control Agreements, in form similar to this Agreement, with certain key executive officers of the Company; and WHEREAS, the Executive is presently a key executive with whom the Company has been authorized by the Board to enter into this Agreement; WHEREAS, as of the date of this Agreement, the specialized knowledge and skills of the Executive will be particularly needed by the Company as the Company continues to expand its medical technology business, and stability at the top management level is and will be critically important to the ultimate success of the Company; and WHEREAS, in order to provide an incentive to members of top management not to seek and consider opportunities outside of the Company, which would substantially impede the continued expansion of the Company's medical technology business, while at the same time continuing to engage in its historic business, the Company's independent directors have determined it to be in the best interests of the Company to revise and amend this Agreement in order to make it consistent with the purposes underlying the original entry of this Agreement; NOW, THEREFORE, to assure the Company of the Executive's continued dedication and the availability of his advice and counsel in the event of any such proposal, to induce the Executive to remain in the employ of the Company or a Subsidiary, and to reward the Executive for his valuable, dedicated service to the Company or a Subsidiary should his service be terminated under circumstances hereinafter described, and for other good and valuable consideration, the receipt and adequacy whereof each party acknowledges, the Company and the Executive agree as follows: 1. OPERATION, EFFECTIVE DATE, AND TERM OF AGREEMENT. (a) This Agreement shall commence on the date hereof and continue in effect through December 31, 2000; provided, however, that commencing on January 1, 1999 and each succeeding January 1 thereafter, the term of this Agreement shall be extended automatically for one additional year (so that at all times the remaining term hereof shall not be less than two (2) years) unless not later than the September 30 preceding such automatic extension date the Company shall have given notice that it does not wish to extend this Agreement. (b) This Agreement is effective and binding on both parties as of the date hereof. Notwithstanding its present effectiveness, the provisions of paragraphs 3 and 4 of this Agreement shall become operative only when, as and if there has been a "Change in Control of the Company." For purposes of this Agreement, a "Change in Control of the Company" shall be deemed to have occurred if (X) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), or persons "acting in concert" (which for purposes of this Agreement shall include two or more persons voting together on a consistent basis pursuant to an agreement or understanding between them), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company and other than a person engaging in a transaction of the type described in clause (Z) of this subsection but which does not constitute a change in control under such clause, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing forty percent (40%) or more of the combined voting power of the Company's then outstanding securities; or (Y) individuals who, as of the date of this Amended and Restated Agreement, constitute the Board and any new director ("New Director") whose election by the Board, or nomination for election by the Company shareholders, was approved by a vote of at least seventy-five percent (75%) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved ("Continuing Members"), cease for any reason to constitute a majority thereof (provided that, for purposes of this clause (Y), the term "New Director" shall exclude (i) a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clauses (X) or (Z) of this subsection, and (ii) an individual whose initial assumption of office as a director is in connection with any actual or threatened contest related to the election of any directors to the Board); or (Z) the shareholders of the Company approve or, if no shareholder approval is required or obtained, the Company or a Subsidiary completes a merger, consolidation or similar transaction of the Company or a Subsidiary with or into any other corporation, or a binding share exchange involving the Company's securities, other than any such transaction which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least seventy-five percent (75%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such transaction, or the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets (excluding, for this purpose, the sale of the Company's Government Technology division). 2. EMPLOYMENT OF EXECUTIVE. Nothing herein shall affect any right which the Executive or the Company or a Subsidiary may otherwise have to terminate the Executive's employment by the Company or a Subsidiary at any time in any lawful manner, subject always to the Company's providing to the Executive the payments and benefits specified in paragraphs 3 and 4 of this Agreement to the extent hereinbelow provided. In the event any person commences a tender or exchange offer, circulates a proxy statement to the Company's shareholders or takes other steps designed to effect a Change in Control of the Company as defined in paragraph 1 of this Agreement, the Executive agrees that, subject to the provisions of Section 5(a)(iii), (c) and (j) of the Employment Agreement, he will not voluntarily leave the employ of the Company or a Subsidiary, and will continue to perform his regular duties and to render the services specified in the recitals of this Agreement, until such person has abandoned or terminated his efforts to effect a Change in Control of the Company or until a Change in Control of the Company has occurred. Should the Executive voluntarily terminate his employment before any such effort to effect a Change in Control of the Company has commenced, or after any such effort has been abandoned or terminated without effecting a Change in Control of the Company and no such effort is then in process, this Agreement shall lapse and be of no further force or effect. 3. TERMINATION FOLLOWING CHANGE IN CONTROL. (a) If any of the events described in paragraph 1 hereof constituting a Change in Control of the Company shall have occurred, the Executive shall be entitled to the benefits provided in paragraph 4 hereof upon the termination of his employment within the applicable period set forth in paragraph 4 hereof unless such termination is (i) due to the Executive's death; or (ii) by the Company or a Subsidiary by reason of the Executive's Disability or for Cause; or (iii) by the Executive other than for Good Reason. (b) If following a Change in Control of the Company the Executive's employment is terminated by reason of his death or Disability, the Executive shall be entitled to death or long-term disability benefits, as the case may be, from the Company no less favorable than the maximum benefits to which he would have been entitled had the death or termination for Disability occurred during the six month period prior to the Change in Control of the Company. If prior to any such termination for Disability, the Executive fails to perform his duties as a result of incapacity due to physical or mental illness, he shall continue to receive his Salary less any benefits as may be available to him under the Company's or Subsidiary's disability plans until his employment is terminated for Disability. (c) If the Executive's employment shall be terminated by the Company or a Subsidiary for Cause or by the Executive other than for Good Reason, the Company shall pay to the Executive his full Salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (d) For purposes of this Agreement: (i) "Disability" shall mean the Executive's incapacity due to physical or mental illness such that the Executive shall have become qualified to receive benefits under the Company's or Subsidiary's long-term disability plans or any equivalent coverage required to be provided to the Executive pursuant to any other plan or agreement, whichever is applicable. (ii) "Cause" shall mean: (A) the conviction of the Executive for a felony, or the willful commission by the Executive of a criminal or other act that in the judgment of the Board causes or will probably cause substantial economic damage to the Company or a Subsidiary or substantial injury to the business reputation of the Company or a Subsidiary; (B) the commission by the Executive of an act of fraud in the performance of such Executive's duties on behalf of the Company or a Subsidiary that causes or will probably cause economic damage to the Company or a Subsidiary; or (C) the continuing willful failure of the Executive to perform the duties of such Executive to the Company or a Subsidiary (other than any such failure resulting from the Executive's incapacity due to physical or mental illness) after written notice thereof (specifying the particulars thereof in reasonable detail) and a reasonable opportunity to be heard and cure such failure are given to the Executive by the Compensation Committee of the Board with the approval thereof by a majority of the Continuing Directors. For purposes of this subparagraph (d)(ii), no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interests of the Company or a Subsidiary. (iii) "Good Reason" shall mean: (A) The assignment by the Company or a Subsidiary to the Executive of duties without the Executive's express written consent, which (i) are materially different or require travel significantly more time consuming or extensive than the Executive's duties or business travel obligations measured from the point in time one (1) year prior to the Change in Control of the Company, or (ii) result in either a significant reduction in the Executive's authority and responsibility as a senior corporate executive of the Company or a Subsidiary when compared to the highest level of authority and responsibility assigned to the Executive at any time during the one (1) year period prior to the Change in Control of the Company, or, (iii) without the Executive's express written consent, the removal of the Executive from, or any failure to reappoint or reelect the Executive to, the highest title held since the date one (1) year before the Change in Control of the Company, except in connection with a termination of the Executive's employment by the Company or a Subsidiary for Cause, or by reason of the Executive' death or Disability; (B) A reduction by the Company or a Subsidiary of the Executive's Salary, or the failure to grant increases in the Executive's Salary on a basis at least substantially comparable to those granted to other executives of the Company or a Subsidiary of comparable title, salary and performance ratings made in good faith; (C) The relocation of the Company's principal executive offices (or in the case of an employee of a Subsidiary, the principal executive offices of such Subsidiary) to a location outside the State of New Jersey, or the Company's requiring the Executive to be based anywhere other than the Company's principal executive offices (or in the case of an employee of a Subsidiary, the principal executive officer of such Subsidiary) except for required travel on the Company's or a Subsidiary's business to an extent substantially consistent with the Executive's business travel obligations measured from the point in time one (1) year prior to the Change in Control of the Company, or in the event of any relocation of the Executive with the Executive's express written consent, the failure by the Company or a Subsidiary to pay (or reimburse the Executive for) all reasonable moving expenses by the Executive relating to a change of principal residence in connection with such relocation and to indemnify the Executive against any loss realized in the sale of the Executive's principal residence in connection with any such change of residence, all to the effect that the Executive shall incur no loss upon such sale on an after tax basis; (D) The failure by the Company or a Subsidiary to continue to provide the Executive with substantially the same welfare benefits (which for purposes of this Agreement shall mean benefits under all welfare plans as that term is defined in Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended), and perquisites, including participation on a comparable basis in the Company's or a Subsidiary's stock option plan, incentive bonus plan and any other plan in which executives of the Company or a subsidiary of comparable title and salary participate and as were provided to the Executive measured from the point in time one (1) year prior to such Change in Control of the Company, or with a package of welfare benefits and perquisites that is substantially comparable in all material respects to such welfare benefits and perquisites; or (E) The failure of the Company to obtain the express written assumption of and agreement to perform this Agreement by any successor as contemplated in subparagraph 5(d) hereof. (iv) "Dispute" shall mean (i) in the case of termination of employment of the Executive with the Company or a Subsidiary by the Company or a Subsidiary for Disability or Cause, that the Executive challenges the existence of Disability or Cause and (ii) in the case of termination of employment of the Executive with the Company or a Subsidiary by the Executive for Good Reason, that the Company or the Subsidiary challenges the existence of Good Reason. (v) "Salary" shall mean the Executive's average annual compensation reported on Form W-2. (vi) "Incentive Compensation" in any year shall mean the amount the Executive has elected to defer in such year pursuant to any plan, arrangement or contract providing for the deferral of compensation. (e) Any purported termination of employment by the Company or a Subsidiary by reason of the Executive's Disability or for Cause, or by the Executive for Good Reason, shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice given by the Executive or the Company or a Subsidiary, as the case may be, which shall indicate the specific basis for termination and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for determination of any payments under this Agreement. The Executive shall not be entitled to give a Notice of Termination that the Executive is terminating his employment with the Company or a Subsidiary for Good Reason more than six (6) months following the later to occur of (i) the Change in Control and (ii) the occurrence of the event alleged to constitute Good Reason. The Executive's actual employment by the Company or a Subsidiary shall cease on the Date of Termination specified in the Notice of Termination, even though such Date of Termination for all other purposes of this Agreement may be extended in the manner contemplated in the second sentence of Paragraph 3(f). (f) For purposes of this Agreement, "Date of Termination" shall mean the date specified in the Notice of Termination, which shall be not more than ninety (90) days after such Notice of Termination is given, as such date may be modified pursuant to the next sentence. If within thirty (30) days after any Notice of Termination is given, the party who receives such Notice of Termination notifies the other party that a Dispute (as heretofore defined) exists, the Date of Termination shall be the date on which the Dispute is finally determined, either by mutual written agreement of the parties, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected); provided that the Date of Termination shall be extended by a notice of Dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such Dispute with reasonable diligence and provided further that pending the resolution of any such Dispute, the Company or a Subsidiary shall continue to pay the Executive the same Salary and to provide the Executive with the same or substantially comparable welfare benefits and perquisites that the Executive was paid and provided as of a date one (1) year prior to the Change in Control of the Company. Should a Dispute ultimately be determined in favor of the Company or a Subsidiary, then all sums paid by the Company or a Subsidiary to the Executive from the date of termination specified in the Notice of Termination until final resolution of the Dispute pursuant to this paragraph shall be repaid promptly by the Executive to the Company or a Subsidiary, with interest at the prime rate generally prevailing from time to time among major New York City banks and all options, rights and stock awards granted to the Executive during such period shall be cancelled or returned to the Company or Subsidiary. The Executive shall not be obligated to pay to the Company or a Subsidiary the cost of providing the Executive with welfare benefits and perquisites for such period unless the final judgment, order or decree of a court or other body resolving the Dispute determines that the Executive acted in bad faith in giving a notice of Dispute. Should a Dispute ultimately be determined in favor of the Executive or be settled by mutual agreement between the Executive and the Company, then the Executive shall be entitled to retain all sums paid to the Executive under this subparagraph (f) for the period pending resolution of the Dispute and shall be entitled to receive, in addition, the payments and other benefits to the extent provided for in paragraph 4 hereof to the extent not previously paid hereunder. 4. PAYMENTS UPON TERMINATION. If within three years after a Change in Control of the Company (or if within nine (9) months prior to a Change in Control if effected in connection with such Change in Control), the Company or a Subsidiary shall terminate the Executive's employment other than by reason of the Executive's death, Disability or for Cause or the Executive shall terminate his employment for Good Reason then, (a) The Company or a Subsidiary will pay on the Date of Termination to the Executive as compensation for services rendered on or before the Executive's Date of Termination, a lump sum cash amount (subject to any applicable payroll or taxes required to be withheld computed at the rate for supplemental payments) equal to (i) 2.99 times the sum of the average for each of the five fiscal years of the Company ending before the day on which the Change in Control of the Company occurs of the Executive's Salary, his Incentive Compensation and the annual cost to the Company of all hospital, medical and dental insurance, life insurance, disability insurance and other welfare or benefit plan provided to the Executive minus (ii) the cost to the Company of the insurance required under subparagraph 4(b) hereof; (b) For a period of three years following the Date of Termination, the Company shall provide, at Company expense, the Executive and the Executive's spouse with full hospital, medical and dental insurance with substantially the same coverage and benefits as were provided to the Executive immediately prior to the Change in Control of the Company; and (c) In event that any payment or benefit received or to be received by the Executive pursuant to this Agreement in connection with a Change in Control of the Company or the termination of the Executive's employment (collectively with all payments and benefits hereunder, "Total Payments") would not be deductible in whole or in part by the Company as the result of Section 280G of the Internal Revenue Code of 1986, as amended and the regulations thereunder (the "Code"), the payments and benefits hereunder shall be reduced until no portion of the Total Payments is not deductible by reducing to the extent necessary the payment under subparagraph (a) hereof. For purposes of this limitation (i) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the date of payment shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Executive and acceptable to the Company's independent auditors the Executive is not likely to constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, and (iii) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. 5. GENERAL. (a) The Executive shall retain in confidence any proprietary or other confidential information known to him concerning the Company and its business (including the Company's Subsidiaries and their businesses) so long as such information is not publicly disclosed and disclosure is not required by an order of any governmental body or court. (b) If litigation or other proceedings shall be brought to enforce or interpret any provision contained herein, or in connection with any tax audit to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provided hereunder, the Company shall indemnify the Executive for his reasonable attorney's fees and disbursements incurred in connection therewith (which indemnification shall be made at regular intervals during the course of such litigation, not less frequently than every three (3) months) and pay prejudgment interest on any money judgment obtained by the Executive calculated at the prime rate of interest generally prevailing from time to time among major New York City banks from the date that payment should have been made under the Agreement; provided that if the Executive initiated the proceedings, the Executive shall not have been found by the court or other fact finder to have acted in bad faith in initiating such litigation or other proceeding, which finding must be final without further rights of appeal. (c) The Company's obligation to pay the Executive the compensation and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, any setoff, counterclaim, recoupment, defense or other right which the Company may have against the Executive or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. Except as expressly provided herein, the Company waives all rights which it may now have or may hereafter have conferred upon it, by statute or otherwise, to terminate, cancel or rescind this Agreement in whole or in part. Except as provided in paragraph 3(f) herein, each and every payment made hereunder by the Company shall be final and the Company will not seek to recover for any reason all or any part of such payment from the Executive or any person entitled thereto. The Executive shall not be required to mitigate the amount of any payment or other benefit provided for in this Agreement by seeking other employment or otherwise. (d) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company (excluding, for this purpose, the sale of the Company's Government Technology division), by written agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this paragraph 5 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (e) This Agreement shall inure to the benefit of, and be enforceable by, the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If the Executive should die while any amounts would still be payable to the Executive hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee or other designee or, if there be no such designee, to the Executive's estate. The obligations of the Executive hereunder shall not be assignable by the Executive. (f) Nothing in this Agreement shall be deemed to entitle the Executive to continued employment with the Company or a Subsidiary, and the rights of the Company or a Subsidiary to terminate the employment of the Executive shall continue as fully as though this Agreement were not in effect. 6. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: William F. Hackett 34 Wilshire Dr. Belle Mead, NJ 08502 If to the Company: Base Ten Systems, Inc. One Electronics Drive P. O. Box 3151 Trenton, New Jersey 08619 Attention: Secretary 7. MISCELLANEOUS. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing, signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No assurances or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement or the Employment Agreement. However, this Agreement is in addition to, and not in lieu of, any other plan providing for payments to or benefits for the Executive or any agreement now existing, or which hereafter may be entered into, between the Company and the Executive. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New Jersey. 8. FINANCING. All amounts due and benefits provided under this Agreement shall constitute general obligations of the Company in accordance with the terms of this Agreement. The Executive shall have only an unsecured right to payment thereof out of the general assets of the Company. Notwithstanding the foregoing, the Company may, by agreement with one or more trustees to be selected by the Company, create a trust on such terms as the Company shall determine to make payments to the Executive in accordance with the terms of this Agreement. 9. VALIDITY. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above. BASE TEN SYSTEMS, INC. T.E. GARDNER By:---------------------------------------- Chairman of the Board and Chief Executive Officer WILLIAM F. HACKETT ---------------------------------------- (EXECUTIVE) EX-21 8 EX. 21 - SUBSIDIARIES OF REGISTRANT EXHIBIT 21 Base Ten Systems, Inc. Subsidiaries of Registrant The following are wholly-owned subsidiaries of the Registrant: State or Jurisdiction Name of Organization ----- --------------- Base Ten Software, Inc. New Jersey (a) Base Ten FlowStream, Inc. New Jersey (a) Base Ten Systems, Ltd. United Kingdom (a) Base Ten Software, Ltd. Ireland (a) BTS Software GmbH Germany (a) Base Ten Systems NV Belgium (a) Base Ten Aerospace and Communications, Inc. New Jersey (b) Base Ten of Canada, Ltd. Canada (b) Base Ten Investment, Co. Delaware (b) Base Ten International Sales, Ltd. Jamaica (b) (a) Financial statements included in Consolidated Financial Statements of Registrant (b) Dormant EX-23 9 EX. 23.1 - CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 Consent of Independent Accountants' The Board of Directors and Shareholders Base Ten Systems, Inc. Trenton, New Jersey 08619 We consent to the incorporation by reference in the Registration Statements No. 33-89712, No. 33-60454, No. 33-55752, No. 333-00721; No. 333-21925; No. 333-59881, No. 333-59883, No. 333-59885 and Amendment No. 1 to Registration Statement No. 2-84451 of Base Ten Systems, Inc. and Subsidiaries on Form S-8 and the Registration Statement No. 33-89710, No. 333-00719, No. 333-06317, No. 333-21923, No. 333-31335, No. 333-34159, No. 333-46095 and No. 333-70535 of Base Ten Systems, Inc. and Subsidiaries on Form S-3 of our report dated April 12, 1999 appearing in this annual report on Form 10-K of Base Ten Systems, Inc. and Subsidiaries for the year ended December 31, 1998. PRICEWATERHOUSECOOPERS LLP Florham Park, New Jersey April 15, 1999 EX-23 10 EX. 23.2 - CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.2 Independent Auditors' Consent The Board of Directors and Shareholders Base Ten Systems, Inc. Trenton, New Jersey 08619 We consent to the incorporation by reference in the Registration Statements No. 33-89712, No. 33-60454, No. 33-55752, No. 333-00721; No. 333-21925; No. 333-59881, No. 333-59883, No. 333-59885 and Amendment No. 1 to Registration Statement No. 2-84451 of Base Ten Systems, Inc. and Subsidiaries on Form S-8 and the Registration Statement No. 33-89710, No. 333-00719, No. 333-06317, No. 333-21923, No. 333-31335, No. 333-34159, No. 333-46095 and No. 333-70535 of Base Ten Systems, Inc. and Subsidiaries on Form S-3 of our report dated February 6, 1998, appearing in this annual report on Form 10-K of Base Ten Systems, Inc. and Subsidiaries for the year ended October 31, 1997. DELOITTE & TOUCHE LLP Parsippany, New Jersey April 15, 1999 EX-24 11 EX. 24 - POWER OF ATTORNEY EXHIBIT 24 Power of Attorney KNOWN ALL MEN BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints Thomas E. Gardner and William F. Hackett, and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution, for him and in his name, place and stead in any and all capacities, to sign the Annual Report on Form 10-K of Base Ten Systems, Inc. for the fiscal year ended December 31, 1998 and any amendments thereto, and to file same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done to comply with the provisions of the Securities Act of 1934, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitutes, may lawfully do or cause to be done by virtue thereof. THOMAS E. GARDNER ------------------------------ Thomas E. Gardner WILLIAM F. HACKETT ------------------------------ William F. Hackett ALEXANDER M. ADELSON ------------------------------ Alexander M. Adelson ------------------------------ David C. Batten ALAN S. POOLE ------------------------------ Alan S. Poole CARL W. SCHAFER ------------------------------ Carl W. Schafer WILLIAM SWORD ------------------------------ William Sword EX-27 12 FDS -- FINANCIAL DATA SCHEDULE
5 U.S. DOLLARS 12-MOS Dec-31-1998 Jan-1-1998 Dec-31-1998 1 17,437,000 104,000 2,692,000 (320,000) 0 20,448,000 9,103,000 (4,077,000) 33,821,000 4,966,000 10,000,000 12,914,000 0 18,731,000 (16,359,000) 33,821,000 7,550,000 7,550,000 9,639,000 25,588,000 (607,000) 0 1,589,000 (19,020,000) 0 (19,020,000) 0 0 0 (19,020,000) (2.09) (2.09)
EX-27 13 EX. 27.2 - RESTATED FINANCIAL DATA SCHEDULE
5 U.S. DOLLARS 2-MOS DEC-31-1997 NOV-30-1997 DEC-31-1997 1 9,118,000 112,000 1,723,000 (140,000) 0 11,231,000 8,011,000 (3,665,000) 24,413,000 5,151,000 15,500,000 6,155,000 0 8,274,000 (14,195,000) 24,413,000 181,000 181,000 1,457,000 3,698,000 0 0 312,000 (3,714,000) 0 (3,714,000) (222,000) 0 0 (3,936,000) (.48) (.48)
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