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SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
[Amendment No.5]
Filed by Registrant [x] Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[..] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant toss.240.14a-12
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BASE TEN SYSTEMS, INC.
(Name of Registrant as Specified in its Charter and Name of Person
Filing Proxy Statement)
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Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11. Set forth amount on which filing
fee is calculated and state how it was determined:
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[x] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11 (a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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BASE TEN SYSTEMS, INC.
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
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Dear Shareholders:
You are cordially invited to attend a special meeting of our
shareholders to vote on proposals to approve the sale of our clinical trials
software business, our merger with ConvergenceHealth.com ("Convergence") and
related transactions, including a 1-for-1,000 reverse split of our common stock
and repurchase of fractional shares (the "Share Combination"). The accompanying
proxy statement describes the proposals and the reasons for their recommendation
by our board of directors. It also provides information about the reconstitution
of our board of directors upon consummation of the merger. The record date for
shareholders entitled to vote at the meeting is September 25, 2002. Information
about the special meeting and the proposals is summarized below.
Special Meeting
Date: October 25, 2002 Place: Pitney, Hardin, Kipp & Szuch LLP
Time: 9:00 a.m. 200 Campus Drive, Morristown, New Jersey
Proposals to be Voted On
Item 1. Sale of Clinical Trials Item 4. Nevada Reincorporation and Name
Software Business Change
Item 2. Share Combination
Item 3. Merger with Convergence Item 5. 2002 Stock Option Plan
By order of the Board of Directors
Kenneth W. Riley,
September __, 2002 Chief Financial Officer
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Contents of Proxy Statement
Item Page Item Page
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General Information ...................................1 Proposal 5 - 2002 Stock Option Plan .......35
Summary Term Sheet ....................................2 Directors and Officers ....................37
Special Factors .......................................3 Principal Shareholders ....................41
Proposal 1 - Sale of Clinical Software Business ......18 Certain Transactions ......................42
Proposal 2 - Share Combination .......................20 Business of Convergence ...................42
Proposal 3 - Merger with Convergence .................25 Incorporation of Documents by Reference ...47
Proposal 4 - Nevada Reincorporation and Additional Information ....................47
Name Change ........................................32 Financial Statements .....................F-1
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE TRANSACTIONS, PASSSED UPON THE
MERITS OR FAIRNESS OF THE TRANSACTIONS OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THE DISCLOSURE IN THIS PROXY STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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BASE TEN SYSTEMS, INC.
PRELIMINARY COPY
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PROXY STATEMENT
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GENERAL INFORMATION
This proxy statement was prepared by management of Base Ten Systems,
Inc. ("Base Ten") to solicit votes on five related proposals to be brought
before a special meeting of our shareholders (the "Proposals") on October 25,
2002 or any adjournment. The Proposals involve the sale of our clinical trials
software business ("Clinical Software") and our pending merger (the "Merger")
with ConvergenceHealth.com ("Convergence"). They also include a proposed
1-for-1,000 reverse split of our common stock and repurchase of fractional
shares (the "Share Combination"), our reincorporation in Nevada and change in
corporate name (the "Reincorporation") and adoption of a new stock option plan
(the "2002 Plan"). This proxy statement describes the Proposals and the reasons
for their recommendation by our board of directors (the "Board"). We did not
retain a financial advisor to evaluate the fairness of the Merger or other
Proposals to our shareholders from a financial point of view. See "Special
Factors" and "Proposal 3 - Merger with Convergence - Determination of Merger
Ratio."
You can vote your shares if you held them on the record date of
September 25, 2002. On that date, there were 5,338,812 shares of our Class A
common stock and 12,667 shares of Class B common stock outstanding. During the
last two years, we have not paid any dividends on our common shares, publicly
issued any common shares or repurchased any of our outstanding common shares.
Additional information about our shares is included in this proxy statements
under the captions "Special Factors - Background of the Share Combination
Proposal." Each of our outstanding common shares of either class gets one vote
on each Proposal, with holders voting together as a single class. The Proposals
for the Clinical Software sale, the Merger and the Reincorporation require
affirmative votes from holders of three-quarters of the votes cast. The
Proposals to approve the Share Combination and the 2002 Plan require affirmative
votes from holders of a majority of our shares. Your vote at the special meeting
is important to us. Please vote your shares of common stock by completing the
accompanying proxy card and returning it in the enclosed envelope.
The proxyholders named on the proxy card will vote your shares as
instructed on the card. If you do not indicate your vote on a Proposal, the
proxyholders will vote in favor of the Proposal. You can change your vote any
time before the meeting by returning a new proxy card or revoking a previously
mailed proxy card by notice to the Company's secretary. Our address is Base Ten
Systems, Inc., 535 East County Line Road, Suite 16, Lakewood, New Jersey 08701,
and our telephone number is (732) 370-6895. You can also attend the special
meeting and vote your shares in person, even if you have previously submitted a
proxy card.
We will hold the special meeting on the scheduled date as long as
holders of a majority of the shares entitled to vote return signed proxy cards
or attend the meeting. We will count your shares toward this quorum requirement
as long as we receive your signed proxy card, even if you vote to abstain on all
Proposals or fail to vote. If your shares are held in "street name" by a broker,
bank or other nominee, they should give you instructions for voting the shares.
Usually, they will vote the shares on your behalf and at your direction. Your
broker or other nominee may refrain from voting your shares held in its street
name if you do not tell the nominee how to vote those shares. In that case, they
will be treated as broker nonvotes. Any broker nonvotes will count for the
quorum requirement but not for approval of any Proposal. See "Additional
Information."
Because the Share Combination will reduce our shareholder base enough
to terminate our reporting obligations as a publicly held small business
company, and because approval of the Share Combination is a condition to the
Merger with Convergence, both of these Proposals are subject to the going
private rules adopted by the Securities and Exchange Commission (the "SEC")
under the Securities Exchange Act of 1934 (the "Exchange Act"). In accordance
with those rules, Base Ten has filed a Statement on Schedule 13E-3 with the SEC
relating to the Share Combination and the Merger (the "Schedule 13E-3"), and
Jesse Upchurch, by virtue of his beneficial ownership of 40.6% of our Class A
common stock, has joined in the Schedule 13E-3 as a filing person. See
"Principal Shareholders." This proxy statement is an exhibit to the Schedule
13E-3 and includes information required by the going private rules under the
Exchange Act.
1
SUMMARY TERM SHEET
The following points highlight what we believe are the most material
terms and features of the two Proposals that are subject to the going private
rules. The points are provided only as an introduction to the more detailed
discussions in the cross referenced sections of this proxy statement.
Share Combination
o Terms. The Share Combination is a 1-for-1,000 reverse split of our common
stock and repurchase of fractional shares at a cash out price equal to the
weighted average sale prices for our common stock during the 20 trading
days preceding the date of the special meeting. See "Proposal 2 - Share
Combination - Terms of the Share Combination."
o Purpose. The Share Combination is designed to reduce our shareholder base
below 300, enabling us to end our reporting obligations as a publicly held
small business company under the Exchange Act. See "Proposal 2 - Share
Combination - Purpose of the Share Combination."
o Benefits. The Share Combination will save administrative costs estimated at
$120,000 annually for our public reporting obligations and will enable our
shareholders with less than 1,000 shares to cash out their investment at
the prevailing market price of our common stock without incurring
transactions costs. See "Special Factors - Benefits of the Share
Combination" and "Proposal 2 - Share Combination - Reasons for the Board's
Authorization of the Share Combination."
o Disadvantages. Ending our reporting obligations under the Exchange Act will
eliminate any public market for our shares and deprive our remaining
shareholders after the Share Combination of any liquidity for their
investment in our common stock. See "Special Factors - Effects of the Share
Combination," "- Disadvantages of the Share Combination," "Proposal 2 -
Share Combination - Risk Factors" and "- Disadvantages of the Share
Combination."
o Dissenters' Rights. Holders of fractional shares resulting from the Share
Combination have dissenters' rights to receive the fair value of their
shares as determined by a court. See "Proposal 2 - Share Combination -
Dissenters' Rights."
Merger with Convergence
o Terms. Convergence will become our wholly owned subsidiary in the Merger,
and the current shareholders of Convergence will receive Class A common
stock of Base Ten representing 75% of our shares outstanding after the
Share Combination. At the time of the Merger, our Board will be
reconstituted with two of our designees and three designees of Convergence
(the "Board Reconstitution"). See "Proposal 3 - Merger with Convergence -
Terms of the Merger Agreement."
o Purpose. The Merger is intended to implement the planned redirection of our
business (the "Business Redirection") to a market sector requiring less
capital resources, technological development and time to market
uncertainties than our historical operations. See "Proposal 3 - Merger with
Convergence - Purpose of the Merger."
o Benefits. The Merger is designed to concentrate our limited remaining
resources in the emerging and potentially sizable market for electronic
dissemination of personalized medical information. In targeting an
unestablished, cash constrained participant in this market as our partner
for implementing the Business Redirection, our Board balanced the attendant
risks against the potential benefits of the Merger for maximizing our
continuing shareholders' investment values through partial ownership of a
combined enterprise with greater upside than their current investment in
Base Ten. See "Special Factors - Potential Benefits of the Merger" and
"Proposal 3 - Merger with Convergence - Reasons for the Board's
Authorization of the Merger."
2
o Disadvantages. Convergence has a history of losses and only marginal sales
of its e-Health offerings to date, with no assurance of achieving market
penetration or profitability . See "Special Factors - Disadvantages of the
Merger," "- Risk Factors" and "Proposal 3 - Merger with Convergence -
Disadvantages of the Merger."
o Dissenters' Rights. Our shareholders have the right to dissent from the
Proposal to approve the Merger and receive the fair value of their shares
as determined by a court. See "Proposal 3 - Merger with Convergence -
Dissenters' Rights."
SPECIAL FACTORS
Background - Contraction of Business
In the last several years, we have incurred substantial losses in
developing new software applications for the pharmaceutical and medical device
markets. After selling our defense related government technology division
("GTD") business in 1997, we focused on development of manufacturing execution
systems ("MES") for pharmaceutical markets, designed to address increasing cost
containment and compliance pressures in that sector. We later identified the
clinical trials market as an additional opportunity to apply our core
technology, ultimately developing the Clinical Software as a tool to support
supplies management and compliance with traceability requirements for clinical
trials of new pharmaceuticals and medical devices. To complement our Clinical
Software offerings, we acquired from Almedica International, Inc. ("Almedica")
two software suites designed to assist in managing supplies for clinical trials.
The acquisition was completed in June 1999 in exchange for 790,000 shares of our
common stock.
Despite the perceived potential of our MES offerings, we encountered
unanticipated difficulties integrating our software with the wide variety of
legacy computer systems deployed in pharmaceutical manufacturing facilities. Our
inability to overcome these obstacles led to our sale of the assets associated
with our MES business to ABB Automation Inc. ("ABB") in October 2000.
The contraction of our business was reflected in declining market
prices for our common stock. Despite our completion of a 1-for-5 reverse split
of our Class A common stock in an effort to regain compliance with the Nasdaq's
$1.00 minimum bid price requirement for continuing SmallCap Market listing, we
were delisted in December 2000 when that effort proved unsuccessful. Since that
time, trading in our common stock has been limited to the OTC Bulletin Board.
We also encountered various technological and marketing difficulties in
the introduction of our Clinical Software offerings, including the products
acquired from Almedica. Neither the internally developed nor acquired offerings
generated adequate sales to cover associated development and marketing expenses.
This contributed to our operating losses aggregating $48.5 million from 1998
through 2000. We anticipate that the Clinical Software business, if retained,
would have continued to operate at a loss.
After selling our MES business in October 2000, we announced a decision
by our Board to discontinue our Clinical Software operations and pursue revenue
generating or strategic opportunities through the Business Redirection in
sectors requiring less capital resources, technological development and time to
market uncertainties. We also announced a reconstitution of our Board and
changes in our senior management to implement the Business Redirection. See
"Directors and Officers."
Proposed Sale of Clinical Software Business
In March 2001, we entered into a Limited Liability Company Agreement
(the "LLC Agreement") with Almedica and Almedica Advanced Technology, LLC
("Almedica LLC") for the sale and deployment of the assets associated with our
Clinical Software. The terms of the LLC Agreement and the reasons for its
authorization and recommendation by our Board are summarized below. See
"Proposal 1 - Sale of Clinical Software Business." To avoid the costs of
multiple shareholder solicitations during the pendency of our Business
Redirection, we elected to defer shareholder meetings for an annual election of
directors in 2001 and approval of the transactions contemplated by the LLC
Agreement. Almedica agreed to defer the closing under the LLC Agreement to
enable us to consolidate all five Proposals in a single solicitation. To
accommodate the development schedule for our Clinical Software pending the
closing under our LLC Agreement, we granted Almedica LLC a license for that
purpose in December 2001 (the "Almedica License").
3
Business Redirection
Beginning in November 2000, we concentrated on identifying
opportunities for a business combination meeting the criteria for the Business
Redirection. We ultimately focused these efforts on exploring and structuring a
potential business combination with ConvergenceHealth.com. Convergence is a
privately held Nevada corporation that has developed interactive web-based
resources called the Personal Health Application ("PHA") designed to assist
people make healthy lifestyle decisions informed by exposure to alternative and
preventative as well as traditional healthcare options. Although Convergence has
generated only marginal revenues and has incurred substantial losses to date,
its initial PHA offering promises to address major priorities of corporate
sponsors by encouraging employees participating in their health plans to adopt
wellness lifestyles that can increase productivity and reduce healthcare costs.
See "Special Factors - Risk Factors of the Merger."
Proposed Merger with Convergence
General Terms of the Merger. On January 18, 2002, we memorialized the
negotiated terms of the Merger in an Agreement and Plan of Merger (as
subsequently amended, the "Merger Agreement") with Convergence and Newco B10,
Inc., a wholly owned subsidiary of the Company (the "Merger Sub"). If the Merger
and other initiatives contemplated by the Merger Agreement are approved by the
parties' shareholders and other closing conditions are satisfied, the Merger Sub
will merge into Convergence, which will survive the Merger as a wholly owned
subsidiary of Base Ten (the "Parent Company"). At the time of the Merger, the
outstanding capital stock of Convergence will be converted into the right to
receive Class A common stock of the Parent Company representing 75% of its
outstanding common shares, and our existing shareholders will own 25% of the
Parent Company's outstanding common stock.
Merger Conditioned on Share Combination and Reincorporation. To reduce
administrative costs following the Merger, the Merger Agreement provides for us
to implement the Share Combination and terminate our reporting obligations as a
publicly held small business company under the Exchange Act immediately prior to
the Merger. The Share Combination is designed to achieve this "going private"
objective through a 1-for-1,000 reverse split of our common stock and repurchase
of fractional shares for cash based on market prices immediately prior to the
Merger. See "Proposal 2 - Share Combination." The Merger Agreement also provides
for the Reincorporation, contemplating our relocation to the corporate offices
of Convergence in Nevada, our reincorporation in that State, a reduction of the
superplurality voting threshold in our charter and a reduction from $5.00 to
$.01 in the par value of our common and preferred stock. As part of the
Reincorporation, we will also change our corporate name to "Convergence Systems,
Inc." or a similar name both for corporate identity purposes and for compliance
with the agreement covering the October 2000 sale of our MES assets to ABB. See
"Proposal 4 - Nevada Reincorporation and Name Change."
Investments in Convergence. After entering into the Merger Agreement
with Convergence, we purchased a total of 1,160,000 shares of its Series A-3
preferred stock for $290,000 to provide it with working capital pending
completion of the Merger (the "Convergence Series A-3 Preferred Stock
Investment"). A portion of the Convergence Series A-3 Preferred Stock Investment
is subject to limited put and call options if the Merger is not completed for
specified reasons. By amendment to the Merger Agreement, we also made an initial
unsecured demand loan of $125,000 to Convergence on August 1, 2002 and agreed to
make additional loans of $50,000 each month from October 2002 until the earlier
of January 2003 or completion of the Merger (the "Convergence Loans"). The
amendment restricts the rights of Convergence to terminate the Merger Agreement
under certain circumstances without first repaying all outstanding Convergence
Loans and repurchasing all or part of the Convergence Series A Preferred Stock
Investment.
Financial Performance of Convergence. Convergence has recognized
accumulated losses of $4.5 million from inception in June 1999 through December
31, 2001, with an additional net loss of $499,500 for the six months ended June
30, 2002. Convergence also had negative cash flow from operations of $2.2
million for the year ended December 31, 2001 and $429,700 for the six months
ended June 30, 2002. The independent auditors' report accompanying the year-end
financial statements of Convergence included at the end of this proxy statement
contains a qualification that the ability of Convergence to continue as a going
concern is dependent on its ability to raise additional funds to implement its
business plan. The report also cautions that the financial statements of
Convergence do not include any adjustments that might be necessary if
Convergence were unable to continue as a going concern. At June 30, 2002,
Convergence had a working capital deficiency of $523,000 and was dependent on
the proceeds of our Convergence Loans to fund operations. See "Business of
Convergence" and "Financial Statements."
4
Background of the Share Combination Proposal
Delisting of Common Stock. In September 1999, our Class A common stock
was transferred from the Nasdaq National Market System to the Nasdaq SmallCap
Market. Later that month, we completed a 1-for-5 reverse stock split of our
Class A common stock in an effort to regain compliance with the Nasdaq's $1.00
minimum bid price requirements for continuing SmallCap Market listing. The
effort proved unsuccessful, and the Class A common stock was delisted from the
Nasdaq SmallCap Market for that reason in December 2000. Since that time, the
only established trading market for both classes of our common stock has been
the OTC Bulletin Board ("OTCBB"), a regulated quotation service that displays
real time quotes, last sales prices and volume information in over-the-counter
equity securities. During 2002, there were only two known market makers for our
common stock, and the average daily trading volume has been less than 5,000
shares.
Stock Price and Volume Data. The following table below shows the
average daily trading volume and the high and low bid prices for our Class A
common stock, as quoted through the OTCBB. Those quotations reflect inter-dealer
prices, retail mark-ups, mark-downs or commissions and may not necessarily
represent actual transactions.
Market Prices Average
High Low Daily Volume
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2001:
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First quarter......................................................$0.16 $ 0.05 9,300
Second quarter..................................................... 0.08 0.05 3,065
Third quarter...................................................... 0.09 0.05 3,202
Fourth quarter..................................................... 0.11 0.05 4,067
2002:
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First quarter......................................................$0.11 $ 0.04 10,447
Second quarter..................................................... 0.10 0.04 2,458
Third quarter...................................................... 0.07 0.05 1,324
Penny Stock Rules. As a result of current trading prices, our common
stock is subject to the penny stock rules under the Exchange Act. In the absence
of an exemption from those rules, broker-dealers making a market in our common
stock are required to provide disclosure to their customers on the risks
associated with its ownership, its investment suitability for the customer,
information on its bid and ask prices and information about any compensation the
broker-dealer will receive for a transaction in the common stock. The
application of these rules generally reduces market making activities and
presumably has limited the liquidity of our common stock.
Security Holders. We currently have approximately 1,100 record holders
of our common stock. Approximately 990 record holders or 90% of those accounts
hold less than 1,000 shares ("Small Record Accounts"). Collectively, the 990
Small Record Accounts hold an aggregate of approximately 300,000 shares. On the
record date for the special meeting, there were 5,338,812 shares of our Class A
common stock and 12,667 shares of Class B common stock outstanding. Accordingly,
the Small Record Accounts represent less than 7% of our outstanding common
stock. Although we do not know the exact number of shares of common stock owned
beneficially (but not of record) by persons holding our shares in nominee or
"street" name, we estimate based on annual requests for proxy materials from
brokers and other nominees that they hold another 200,000 shares for as many as
400 additional beneficial owners of less than 1,000 shares of our common stock
("Small Nominee Accounts"). Based on this data, we estimate on a combined basis
there are approximately 1,400 Small Record Accounts and Small Nominee Accounts
(collectively, "Small Accounts"), holding an aggregate of up to 500,000 shares
representing less than 10% of our outstanding common stock.
Market Value of Small Accounts. Based on a weighted average share price
of approximately $.05 per share of our common stock during the last 12 months, a
median Small Account of 500 shares had a market value of $25.00. In view of the
decline in the market value of our common stock, the Board is concerned that the
prospect of incurring brokerage commissions and administrative inconvenience has
deterred holders of Small Accounts from selling their shares.
5
Cost of Maintaining Public Company Franchise. We estimate that our
transfer agent fees and professional fees for legal and accounting services
associated with our reporting obligations as a publicly held small business
company are approximately $120,000 on an annual basis ("Reporting Costs"). This
translates to over $100 per record holder account each year, which far exceeds
the average market value of the median Small Account. These Reporting Costs do
not account for the value of management's time spent on Exchange Act compliance
or the intangible burden of decreased confidentiality of proprietary information
associated with our public reporting obligations.
Management Costs of Exchange Act Compliance. Our senior management is
responsible for ensuring our compliance with reporting and related obligations
as a publicly held small business company under the Exchange Act. We estimate
that this requires them to allocate up to 10% of their time on these matters.
While we did not account for this factor in estimating our annual Reporting
Costs, our Board considered the potential efficiencies to be derived by
management from eliminating their reporting burden.
Competitive Burden of Exchange Act Compliance. Our public reporting
obligations include disclosure requirements that may involve business methods,
plans and opportunities we would otherwise consider proprietary or prefer to
keep confidential in the absence of those disclosure requirements. Through our
proposed Merger with Convergence, we expect to become a web-based healthcare
information company. This is an emerging and highly competitive business. Our
reporting and related obligations as a publicly held small business company
under the Exchange Act could place us at a disadvantage in competing with
privately held participants in this field. See "Business of Convergence -
Competition."
Termination of Exchange Act Registration. Reporting companies are
entitled to terminate their Exchange Act registration if their shareholder base
has declined below 500 holders of record or below 300 for registrants with total
assets of less than $10 million. With only 100 record holders of our Class B
common stock, we are eligible to deregister this class at any time. If our
shareholders approve the Share Combination, our repurchase of fractional shares
from Small Accounts can be expected to reduce the record holders of our Class A
common stock below 300, enabling us to deregister both class of our common stock
and terminate our reporting obligations as a publicly held small business
company under the Exchange Act.
Purpose of the Share Combination
Our Board believes the advantages to our shareholders and our business
usually associated with a public company franchise have been negated by the loss
of market value and liquidity in our common stock from the downturn in our
business and delisting of our shares. The Board has proposed the Share
Combination as the most efficient means to achieve Exchange Act deregistration.
By enabling us to terminate our Exchange Act registration, the Share Combination
is intended to eliminate our Reporting Costs so all of our limited financial
resources net of fractional share repurchase costs can be applied to implement
our Business Redirection. The Board also considered that our repurchase of
fractional shares in the Share Combination will provide liquidity to holders of
Small Accounts as well as eliminating the transaction and administrative costs
they would otherwise incur to liquidate their Small Accounts.
Alternatives to the Share Combination
The Board considered the following alternatives for achieving Exchange
Act deregistration but opted for the Share Combination as the simplest and least
costly approach:
o A tender offer at the current market price of our common stock was
rejected on the assumption that most holders of Small Accounts would
not make the effort to tender their shares in view of their nominal
value.
o A repurchase program was rejected in view of the inactive trading
market for our common stock and the likelihood that the program would
not cash out enough Small Accounts to reduce our shareholder base below
300.
o A statutory merger into a merger subsidiary would involve the same
issues as the Share Combination and would be more costly to implement.
6
Timing of the Share Combination Proposal
The Share Combination is being proposed at this time because its
implementation is a condition to the Merger with Convergence. In addition,
prompt implementation of the Share Combination will minimize our Reporting Costs
and provide immediate liquidity to holders of Small Accounts desiring to
reinvest or otherwise make use of their cash out payment. Including the Proposal
with the other Proposals to be brought before the special meeting also saves
administrative costs that would be incurred if the Share Combination was
proposed at a different time.
Effects of the Share Combination
Reduction in the Number of Shareholders, Outstanding Shares and
Authorized Shares. We expect the Share Combination to reduce the number of
shareholders of record from approximately 1,100 to 110. The repurchase of
fractional shares from these Small Record Accounts should decrease our current
common shares outstanding from 5,351,497 to approximately 5,050,000 or 5,050
shares on a post-split basis. We also estimate a further reduction in shares
outstanding from Small Nominee Account repurchases. Authorized stock will be
reduced to 270,000 Class A common shares, 4,000 Class B common shares and 994
preferred shares. The par value of all classes of our stock will be reduced to
$.01 per share. This will affect the allocation between stated capital and
additional paid-in capital on out balance sheet.
Changes in Shareholders' Equity and Book Value per Share. Assuming that
the market price our common stock at the time of the Share Combination remains
at its current level of $.05 per share, we estimate a cost of approximately
$25,000 for repurchasing fractional shares from Small Accounts, plus related
administrative costs estimated at $5,000. At June 30, 2002, our shareholders'
equity was $572,000, and book value per share was 10.7(cent). Based on a $.05
cash out price for Small Accounts holding a total of 500,000 current shares, the
Share Combination will reduce shareholders' equity as of June 30, 2002 to
$542,000 and will increase book value per share to $11.2(cent). If the market
price of our common stock at the time of the Share Combination exceeds the
current price of $.05 per share, the effects of the Share Combination on
shareholders equity will change accordingly.
Termination of Our Exchange Act Reporting Obligations. By reducing our
shareholder base below 300 record holders, the Share Combination will enable us
to terminate our registration as a small business reporting company under the
Exchange Act. This will eliminate our obligation to furnish financial and other
information to remaining shareholders in annual reports on Form 10-KSB,
quarterly reports on Form 10-QSB, current reports on Form 8-K and proxy
statements on Schedule 14A. By eliminating this obligation, we expect to save
approximately $120,000 in annual Reporting Costs. We plan to file a Notice on
Form 15 with the SEC to terminate our Exchange Act Registration upon approval of
the Share Combination.
Termination of Exchange Act Reporting Obligations of Our Officers,
Directors and Principal Shareholders. Following the termination of our Exchange
Act registration, our officers, directors and 10% shareholders will no longer be
subject to various reporting obligations and trading restrictions under the
Exchange Act. These include beneficial ownership reporting requirement under
Section 13(d) and Section 16(a), as well as short-swing profit restrictions
under Section 16(b) of the Exchange Act.
Elimination of Trading Market. Because we will cease filing periodic
reports under the Exchange Act, our common stock will not be eligible for
quotations on the OTCBB or any other established trading market. This will
adversely affect the liquidity of our common stock, which in turn could impair
its value in private resale transactions. The absence of a trading market for
our common stock could also limit our access to equity capital. since potential
investors may be deterred by the inability to readily liquidate their
investment.
Adjustments to Derivative Securities. Proportionate adjustments will be
made to the number of covered shares and exercise price of all outstanding
employee stock options in accordance with our stock option plans.
Financial Effect of the Share Combination
The Share Combination and utilization of at least $30,000 to fund our
repurchase of fractional shares and related administrative expenses are not
expected to have any material adverse effect on our capitalization, liquidity,
results of operations or cash flow. Any significant increase in the cash out
price for fractional shares or the number of Small Accounts, while not
anticipated, could substantially increase our costs of implementing the Share
Combination. We expect to fund those expenses, regardless of their level, from
working capital. At June 30, 2002, our cash and cash equivalents were $418,000.
Although the Convergence Loans have reduced our working capital since June 30,
2002, we expect to have adequate resources remaining at the time of the Share
Combination to fund its costs.
7
The following table presents pro forma financial information reflecting
the anticipated effects of the Share Combination on our historical financial
position and results of operations. The unaudited pro forma balance sheet
reflects the Share Combination as if it had occurred on June 30, 2002, and the
unaudited pro forma statement of operations reflects the transaction as if it
had occurred at the beginning of the periods presented, with assumed transaction
costs of $30,000 reflected only in the interim period. This information is not
necessarily indicative of what the Company's financial position or results of
operations would have been if the Share Combination had been implemented on
those dates. The information should be read in conjunction with the historical
Consolidated Financial Statements and the accompanying Notes of Base Ten
incorporated by reference in this proxy statement. See "Incorporation of
Documents by Reference."
(In thousands, except per share data)
Unaudited
Pro Forma Pro
Historical Adjustments Forma
---------- ----------- -----
Summary of Operations - Six Months Ended June 30, 2002:
Revenues, net..................................................... $ -- $ --
--------- ---------
Selling, general and administrative expenses(a)................... 353 $ 30 383
--------- --------- ---------
Operating loss................................................. (353) (30) (383)
Other income, net................................................. 11 11
--------- --------- ---------
Net loss.......................................................... $ (342) $ (30) $ (372)
========= ========= =========
Net loss per common share......................................... $ (.06) $ (.08)
========= =========
Weighted average common shares outstanding(b)..................... 5,351 (500) 4,851
========= =========
Summary of Operations - Year Ended December 31, 2001:
Revenues, net..................................................... $ -- $ --
--------- ---------
Selling, general and administrative expenses(a)................... 841 841
--------- ---------
Operating loss................................................. (841) (841)
Other income, net................................................. 114 114
--------- ---------
Net loss.......................................................... $ (727) $ (727)
========= =========
Net loss per common share......................................... $ (.14) $ (.15)
========= =========
Weighted average common shares outstanding(b)..................... 5,351 (500) 4,851
========= =========
Summary Balance Sheet Data - As of June 30, 2002:
Working capital................................................... $ 449 $ (30) $ 419
Total assets...................................................... 954 (30) 924
Total liabilities................................................. 202 202
Shareholders' equity.............................................. 752 (30) 722
Book value per share(b)........................................... .14 .01 .15
- ---------------------------
(a) Reflects additional transaction and administrative costs for the Share
Combination estimated at $30,000 for the six months ended June 30, 2002 but does
not reflect the elimination of Reporting Costs estimated at $60,000 for the six
months ended June 30, 2002 or $120,000 for the year ended December 31, 2001.
(b) Reflects the repurchase of an estimated 500,000 common shares from
Small Accounts in the Share Combination.
Potential Detriments of the Share Combination
Relinquishment of Small Account Equity Interest. Holders of Small
Accounts will no longer have any equity interest in Base Ten after the Share
Combination and will not participate in any future potential earnings or growth.
It may not be possible for cashed out shareholders to reacquire an equity
interest, since there will be no established trading market for our shares after
the Share Combination.
8
Decrease in Remaining Shareholders' Liquidity and Access to
Information. The termination of our reporting obligations under the Exchange Act
will substantially reduce our remaining shareholders' liquidity and access to
information about our activities and financial performance.
Fairness of the Share Combination
Financial Fairness Overview. Our Board believes the Share Combination
as a whole is in the best interests of Base Ten and is fair to our shareholders,
including holders of Small Accounts, from a financial point of view. It reached
this conclusion based solely on its own evaluation. It did not retain an
investment bank or other financial adviser to render a report or opinion on the
fairness of the Share Combination from a financial point of view.
Advantages and Disadvantages. In evaluating the financial fairness of
the Proposal, our Board weighed the advantages to our shareholders and our
business usually associated with a public company franchise against the
disadvantages of public reporting obligations. The Board considered that the
typical public company advantages of increased liquidity for shareholders and
increased access to capital markets for the issuer have been negated by the loss
of market value and liquidity in our common stock from the downturn in our
business and delisting of our shares. The Board weighed this against the
competitive disadvantages and management burdens of public reporting
obligations. The Board also considered that our repurchase of fractional shares
in the Share Combination will provide liquidity to holders of Small Accounts as
well as eliminating the transaction and administrative costs they would
otherwise incur to liquidate their Small Accounts. The Board was also influenced
by the fact that our annual Reporting Costs per record holder account are more
than four times the value of a median Small Account based on the current market
price of our common stock.
Fairness of Cash Out Price. As part of its evaluation, the Board
focused on the fairness of the Share Combination to holders of Small Accounts.
Under the terms of the Share Combination, holders of fewer than 1,000 current
shares of our common stock will receive cash in lieu of fractional shares
resulting from the proposed 1-for-1,000 reverse stock split in an amount per
current share equal to the weighted average sale prices reported by the OTCBB
for our common stock during the 20 trading days preceding the date of the
special meeting, Although the Board considered its use of prevailing market
price as the most appropriate measure of value for the fractional shares to be
held in Small Accounts, it recognized that our common stock is thinly traded,
with a relatively wide spread between the bid and asked price, which it
attributes to the limited number of market makers on the bid side.
Alternative Cash Out Price Based on Book Value. In determining to rely
on prevailing market price for the cash out value of Small Accounts, the Board
considered that the weighted average sale price of $.05 per share reported by
the OTCBB for our Class A common stock during the second quarter of 2002
reflects a substantial discount to our net book value of $.14 per share at June
30, 2002. Although the ultimate cash out price may change based on trading
prices for our common stock during the 20 trading days preceding the special
meeting, the Board acknowledges that this disparity weights against the fairness
of the Share Combination to holders of Small Accounts. The Board also recognizes
that the $.07 per share disparity translates to $35 for a median Small Account
of 500 current shares, which it does not regard as material, compared to a
potential $35,000 increase in our total cash out cost, which it regards as
material in view of our limited financial resources. The Board concluded that
any potential inequity to holders of Small Accounts from this aspect of the
Share Combination is mitigated by the absence of brokerage commissions and
administrative inconvenience they would otherwise incur to cash out their
investment.
Alternative Cash Out Price Based on Going Concern Value or Earnings.
While the Board expects Base Ten to continue as a going concern through its
proposed Merger with Convergence, the downturn and contraction of our business
makes it difficult in the Board's view to assess our going concern value for
purposes of determining an alternative cash out price for fractional shares held
in Small Accounts as a result of the Share Combination. Although an evaluation
of going concern value would ordinarily focus on publicly available data on
companies in the same industry sector, our Business Redirection has entailed the
sale of our MES business and the proposed sale of our Clinical Software
business, which represents our only remaining line of business. Accordingly, the
Board determined that any effort to apply this traditional valuation method
would be inappropriate under current circumstances. The absence of any
contemporary earnings history also make any alternative valuation of Small
Accounts equally inappropriate in the Board's view.
9
Alternative Cash Out Price Based on Liquidation Value. After accounting
for the sale of our Clinical Software business, our primary assets are cash and
cash equivalents of $418,000 as of June 30, 2002 and our Convergence Series A-3
Preferred Stock Investment of $290,000. See "Proposed Merger with Convergence"
above. Since June 30, 2002, our cash position has declined primarily from our
initial Convergence Loan of $125,000 and our Reporting Costs, including
additional professional fees in connection with the special meeting. After
accounting for these developments, the Board estimates that an orderly
liquidation of Base Ten carried out over a reasonable period of time would
generate proceeds net of liquidation expenses in the range between $.06 and $.08
per share. The Board acknowledges that, like its alternative book value
analysis, the disparity with our current market price of $.05 per common share
weights against the fairness of the Share Combination to holders of Small
Accounts, although it does not view the disparity as material and does not
consider its liquidation analysis as necessarily indicative of actual
liquidation results.
Financial Fairness - Conclusion. In reaching its conclusion on the
financial fairness of the Share Combination, the Board did not assign any
specific weights to the foregoing factors. On the cumulative import of those
factors, the Board unanimously concluded that the Share Combination as a whole
is in the best interests of Base Ten and is fair to our shareholders, including
holders of Small Accounts, from a financial point of view. In selecting a
valuation method for the cash out of Small Accounts, the Board concluded that a
market based valuation was more appropriate than reliance on net book value,
going concern value or liquidation value in view of the limited relevance of
each alternative. The Board unanimously recommends approval of the Proposal by
our shareholders. Each of our directors, officers and principal shareholders has
indicated an intention to vote in favor of the Share Combination. See "Directors
and Officers" and "Principal Shareholders.
Procedural Fairness. The Board did not appoint an independent
committee, engage an independent representative or retain an investment bank or
other financial adviser to represent the interests of Small Account holders or
other unaffiliated holders of either class of our common stock in negotiating
the terms of the Share Combination. The Board considered several alternative
transaction structures to accomplish a reduction in our shareholder base below
300 record accounts but unanimously opted for the Share Combination as the
simplest and least expensive approach. The Board considered but rejected a
structure requiring approval not only from holders of a majority of our
outstanding shares but also from a majority of unaffiliated shareholders.
Despite the absence of an independent committee, representative or appraisal and
the lack of a separate voting requirement for approval from unaffiliated
shareholders, the Board concluded that the Share Combination is not only
substantively fair but also procedurally fair to unaffiliated holders of both
our Class A and Class B common stock for the following reasons:
o The cash out price for our repurchase of fractional shares from Small
Accounts will be determined by using the weighted average per share
trading price of our common stock during the 20 trading days after the
mailing of this proxy statement. During that period, present
shareholders, including holders of Small Accounts, will have an
opportunity both to evaluate all of the Proposals and to compare the
potential value of their investment in our common stock with other
available investments.
o While remaining unaffiliated shareholders will benefit from a projected
increase in our net book value per share, the increase will be offset
by the reduction in available information about Base Ten and a
significant loss of liquidity in both classes of our common stock
following the termination of our reporting obligations under the
Exchange Act.
o Although holders of Small Accounts will be entitled to receive
immediate cash consideration for their shares, remaining shareholders
will bear the burden of the expenses of the going private transaction,
with no assurance when, if and for how much they will be able to
liquidate their investments in our common stock.
o The Share Combination is being effected in accordance with all
requirements under New Jersey law and our charter, which require the
affirmative votes from the holders of a majority of our common stock
outstanding on the record date. As of that date, our officers and
directors as a group do not own a sufficient number of shares to assure
approval of the Proposal, although our two principal shareholders,
Almedica and Jesse Upchurch can determine the outcome of the
shareholder vote. See "Principal Shareholders."
o Between the date of this proxy statement and the effective date of the
Share Combination, all of our shareholders will have an opportunity to
adjust the number of our common shares they will own on the effective
date so that holders who would otherwise be cashed out can become
continuing holders and holders of more than 1,000 shares can divide or
otherwise adjust their holdings into Small Accounts that will be cashed
out.
10
Conduct of Business after the Share Combination
If the Share Combination is approved, we plan to immediately terminate
our registration as a small business reporting company under the Exchange Act.
This will eliminate our obligation to furnish financial and other information to
remaining shareholders in annual reports on Form 10-KSB, quarterly reports on
Form 10-QSB, current reports on Form 8-K and proxy statements on Schedule 14A.
By eliminating this obligation, we expect to save approximately $120,000 in
annual Reporting Costs. Terminating our Exchange Act registration will also
relieve our officers, directors and principal shareholders of various filing
obligations under the Exchange Act. Because we will cease filing periodic
reports under the Exchange Act, our common stock will not be eligible for
quotations on the OTCBB or any other established trading market. This will
adversely affect the liquidity of our common stock, which in turn could impair
its value in private resale transactions. The absence of a trading market for
our common stock could also limit our access to equity capital. since potential
investors may be deterred by the inability to readily liquidate their
investment. See "Effects of the Share Combination" above.
Risk Factors of the Merger
Recurring Losses. Our operations after completion of the Clinical
Software Sale, the Share Combination and the Merger will be conducted solely
through Convergence, which has generated only marginal revenues from operations.
Convergence has recognized accumulated losses of $5.0 million from inception in
June 1999 through June 30, 2002 and had negative cash flow from operations of
$2.2 million for the year ended December 31, 2001 and $430,000 for the six
months ended June 30, 2002. At June 30, 2002, Convergence had a working capital
deficiency of $523,200 and a shareholders' deficiency in the same amount. The
losses recognized by Convergence primarily reflect expenses incurred in
developing and marketing its PHA product offering. The business plan for
Convergence contemplates substantial capital expenditures to fund its ongoing
operations without any assurance of deriving revenues from operations.
Convergence anticipates that its costs to complete development and to commence
marketing and deployment of its PHA services will contribute to recurring losses
at the rate of approximately $50,000 per month following the Merger. Our ability
to achieve profitable operations through the Convergence subsidiary could be
adversely affected by delays or inefficiencies in the development cycle,
inadequate marketing resources, lack of sponsor or consumer acceptance of its
products, competition and changing technology.
Risks of Financial Leverage. Convergence is significantly leveraged,
with total liabilities of $604,900 at June 30, 2002. See "Business of
Convergence - Financial Information." The ability of Convergence to repay its
obligations and fund the execution of its business plan will be dependent on its
future performance and ability to raise equity capital on acceptable terms. In
the absence of additional capital, Convergence could face repayment defaults its
remaining obligations, potentially requiring Convergence to liquidate or seek
protection under the bankruptcy laws. In that event, our shareholders could
expect to lose their entire investment.
Risk of Inadequate Financial Resources. Since January 2002 when we
executed the Merger Agreement, Convergence has been dependent on the proceeds
from our Convergence Series A-3 Preferred Stock Investment and Convergence Loans
for its working capital requirements pending the Merger. See "Proposed Merger
with Convergence" above. Other than our cash and cash equivalents to be
available to Convergence after the Merger, there are currently no commitments
from any sources to provide additional financing. In the absence of revenues
from sponsorship, licensing or subscription arrangements for its PHA services,
our contributed working capital, estimated at $500,000 at the time of the
Merger, is expected to be allocated in part to retire outstanding payables and
the balance to fund ongoing efforts to refine, market and deploy PHA product
offerings. If these efforts are pursued at the desired pace and scope, our
contributed working capital will likely be expended by the end of 2002.
Accordingly, since Convergence does not expect to begin generating significant
revenues before those funds are expended, it will be required to either limit
future development and marketing activities or raise additional equity capital
or incur more debt to continue financing those activities. The issuance of
additional equity could be dilutive to existing shareholders, and the
alternative of financing development through borrowings could reduce its
operating flexibility and weaken our consolidated financial condition.
Risks of New Product Development. Our operations through Convergence
after the Merger will be subject to all of the technological, business and
financial risks inherent in the commercialization of new products for markets in
which we are not an established participant. The success of the PHA offerings
will depend not only on securing sponsorship or licensing arrangements with
employers, health benefit intermediaries and other organizations but also on the
willingness of their employees and plan participants to utilize this data base
resource. Convergence could encounter resistance to implementation of its
technology based on a number of concerns by potential sponsors, including
possible exposure to end user claims or fall out from the traditional medical
establishment. The developmental as well as potentially controversial nature of
the alternative medicine components of this product makes its ultimate success
in the marketplace uncertain.
11
Risk of Inadequate Marketing Resources. The limited exposure of
Convergence to the healthcare markets could impair its ability to penetrate
those markets with sufficient speed to fully capitalize on its perceived
technological lead time for its PHA offering. In the absence of substantial
market penetration, it will be unable to generate sufficient sponsorship,
licensing or subscription fees to attain profitability. While Convergence will
seek to use relationships with distributors and health benefit intermediaries to
facilitate marketing arrangements for its products, it expects to remain
primarily dependent on its own limited marketing resources for developing
licensing or similar arrangements with sponsoring organizations. Convergence is
seeking to establish strategic alliances to enhance its licensing opportunities
but does not anticipate meaningful results until initial PHA sponsorships are in
place and a track record is established.
Risk of Technological Obsolescence. The marketplace for medical
information is characterized by rapid technological changes. Products and
services using different technologies could be introduced and established before
market acceptance is achieved for PHA services. Developers of similar products
and services have experienced time lags of one year or more between commencement
of marketing activities through the completion of field trials and ultimate
sales or subscriptions. If Convergence experiences similar or longer delays, it
could face the risk of the product's technological obsolescence.
Dependence on Proprietary Technology and Risks of Infringement.
Convergence believes its PHA offering is distinguished in large part by a
proprietary interactive technology designed to enable users to find desired
information in its data base easily and quickly. This technology is subject to
the risks of misappropriation and infringement. Despite efforts to protect its
proprietary rights in this technology through a pending patent application as
well as confidentiality procedures and contractual provisions intended to lower
the risk of misappropriation or infringement, unauthorized parties may
nevertheless attempt to copy aspects of this product or obtain and use
information that Convergence considers proprietary. Policing unauthorized use of
its proprietary technology and content may be difficult and costly. As a result,
efforts by Convergence to protect its proprietary rights may be inadequate. In
addition, its competitors may independently develop similar technology enabling
them to penetrate markets otherwise accessible to Convergence.
Competition. The healthcare information industry is intensely
competitive and fragmented. Principal competitors of Convergence currently
include national and regional firms offering information systems and platforms
through established internet sites or proprietary networks. In addition, many
educational organizations provide a broad range of medical information data base
resources without charge. All of these competitors have substantially greater
financial, technical, marketing and deployment resources than Convergence. Many
of these competitors have the added advantage of offering a greater diversity of
products with a substantial installed customer base. Moreover, while Convergence
is not aware of any direct competitors that offer comparable interactive
features and a focus on preventative health options, current indirect
competitors with greater resources than Convergence could enter and control this
market before Convergence obtains any meaningful market share.
Risk of Product Liability. Convergence may be exposed to claims by PHA
end users to the effect that the services were defective, failed to properly
assess health status or provided guidance resulting in injuries, even if the
information underlying the claim was licensed by Convergence from highly
reputable third parties or was generally accepted in the preventative healthcare
community. While Convergence intends to include disclaimers in its agreements
with sponsors and publish similar cautionary notices on PHA web sites to limit
its exposure to liability claims, these disclaimers may be unenforceable in
whole or in part. Insurance against these types of potential claims, even if
obtainable on acceptable terms, may also fail to fully protect Convergence from
liability. Defense of any liability claims could require Convergence to expend
significant resources and could be unsuccessful, resulting in substantial
monetary and reputational damages.
Dependence on the Internet and Computer Systems. Convergence will
depend on the continued growth in the use and efficient operation of the
Internet. Web based markets for information, products and services are new and
rapidly evolving. If Internet usage does not continue to grow or increases more
slowly than anticipated, Convergence could be unable to secure sponsorship and
licensing arrangements for its PHA offerings. Convergence will also be dependent
on adequate network infrastructure, consistent quality of service and
availability to customers of cost-effective, high-speed Internet access. If
systems maintained by Convergence cannot meet customer demand for access and
reliability, these requirements will not be satisfied, and customer satisfaction
could degrade substantially, adversely affecting prospects for market
penetration and profitability.
12
Regulatory Risks. The laws governing the Internet remain largely
unsettled, even in areas where there have been legislative initiatives. It may
take years to determine whether and how Internet services are affected by
existing laws, including those governing intellectual property, privacy, libel,
product liability and taxation. Future legislation or judicial precedents could
reduce Internet use generally and decrease its acceptance as a communications
and commercial medium, adversely affecting the prospects of Convergence.
Privacy Related Risks. Convergence intends to retain a data base of
confidential information provided by PHA users as part of an interactive
assessment available with this service. While Convergence intends to maintain
the confidentiality of this data through the security of its facilities and
infrastructure and restrict its use to PHA functions, it may nevertheless be
vulnerable to physical break-ins, computer viruses, programming errors or
similar disruptions. A material security breach could expose Convergence to
liability and reputational damage.
Risks Associated with Dependence on Key Personnel. Convergence has
substantially reduced its technical and marketing staff in response to working
capital constraints, and the execution of its business plan will be dependent to
a large extent upon its ability to attract and retain highly skilled technical,
managerial and marketing personnel. Current compensation and benefit levels
could contribute to the loss or reduced productivity of remaining personnel and
impair the ability of Convergence to attract new personnel, either of which
could have a material adverse affect on its business and financial prospects.
Effects of the Merger
Operations after the Merger. If the Clinical Software sale, Share
Combination and Merger are completed, we will be privately held 25% by our
current shareholders (other than holders of Small Accounts) and 75% by the
current shareholders of Convergence, and our operations will be conducted solely
through Convergence, which will be a wholly owned subsidiary of the Parent
Company. Our remaining assets, consisting primarily of cash and cash equivalents
of $418,000 at June 30, 2002, to the extent available after providing the
Convergence Loans prior to the Merger, will be used to refine, market and deploy
its PHA product offerings. The business plan for Convergence contemplates
substantial capital expenditures to fund its ongoing operations without any
assurance of deriving adequate revenues to support those operations. We
anticipate that operating costs for Convergence will contribute to recurring
losses at the rate of approximately $50,000 per month following the Merger. Our
ability to achieve profitable operations through the Convergence subsidiary
could be adversely affected by delays or inefficiencies in the development
cycle, inadequate marketing resources, lack of sponsor or consumer acceptance of
its products, competition and changing technology.
See "Risk Factors of the Merger" above"
Dilutive Effect of the Merger. If the Share Combination and the Merger
are approved and implemented, our continuing shareholders will own a
substantially smaller percentage interest in the Parent Company than they
currently own in Base Ten, with a corresponding decrease in their voting power.
Our unaffiliated shareholders other than holders of Small Accounts currently own
1,975,507 shares of our Class A and Class B common stock, representing 41% of
our total common shares expected to remain outstanding after giving effect to
the Share Combination. After the Merger, their shares will represent only 10% of
the Parent Company's outstanding Class A and Class B common stock.
Control By Former Shareholders of Convergence. As a group, the 28
current shareholders of Convergence will receive shares of our common stock
("Merger Shares") that will represent 75% of the Parent Company's common stock
outstanding immediately after the Share Combination and the Merger (the "Merger
Ratio"). As a result of the Reincorporation, the affirmative vote of at least
two thirds of the votes cast by the holders of the Parent Company's common stock
will be able to determine the outcome of any business combination proposal, and
all other matters submitted to a shareholder vote will be determined by holders
of a plurality of the votes cast. Accordingly, our current shareholders whose
common stock is not repurchased in the Share Combination will be unable to
control the election of any Board members or any other aspects of corporate
governance after the Merger, and holders of the Merger Shares will have the
voting power to determine these matters.
13
Financial Effects of the Merger
The following table sets forth a summary of historical and pro forma
financial information for Base Ten as of the dates and for the periods
indicated. Except as otherwise noted, the historical financial information
presented below is derived from the audited Consolidated Financial Statements of
Base Ten incorporated by reference in this proxy statement. See "Documents
Incorporated by Reference." This information should be read in conjunction with
those Consolidated Financial Statements and the accompanying Notes. The pro
forma financial information presented below gives effect to the Merger as of the
beginning of each period reported in the Summary of Operations and as of the
balance sheet date for the Summary Balance Sheet Data. This information is
unaudited and should be read in conjunction with the Unaudited Pro Forma
Consolidated Financial Statements of Base Ten and related Notes thereto as well
as the Financial Statements of Convergence and the related Notes thereto
included elsewhere in this proxy statement. See "Business of Convergence -
Financial Information" and "Financial Statements."
Summary Historical and Pro Forma Financial Data
Year Ended
Six Months Ended ---------------------------------------------------------
June 30, 2002 December 31, 2001 December 31, 2000
--------------------------- -------------------------- --------------------------
Historical Pro Forma Historical Pro Forma Historical Pro Forma
------------ --------- ------------ --------- ------------ ---------
Unaudited Unaudited Unaudited
Summary of Operations:
Net loss from continuing operations....... $ (342) $ (841) $ (727) $ (2,088) $ (3,433) $ (6,596)
Net loss from discontinued operations..... -- -- -- -- (5,831) (5,832)
----------- ----------- ----------- ----------- ----------- -----------
Net loss from operations.................. $ (342) $ (841) $ (727) $ (2,088) $ (9,264) $ (12,427)
===========- =========== =========== =========== =========== ===========
Net earnings (loss) per common share from: (1)
Continuing operations.................. $ (.06) $ (.04) $ (.14) $ (.10) $ (.66) $ (.31)
Gain on redemption of preferred stock.. -- -- -- -- 2.25 .55
Discontinued operations................ -- -- -- -- (1.12) (.27)
----------- ----------- ----------- ----------- ----------- -----------
Net earnings (loss) per share............. $ (.06) $ .(04) $ (.14) $ (.10) $ .47 $ (.03)
========== =========== =========== =========== =========== ===========
As of June 30, 2002 As of December 31, 2001 As of December 31, 2000
-------------------------- -------------------------- --------------------------
Historical Pro Forma Historical Pro Forma Historical Pro Forma
------------ --------- ------------- --------- ------------ ---------
Unaudited Unaudited Unaudited
Summary Balance Sheet Data:
Working capital (deficit)................. $ 449 $ (73) $ 1,072 $ (304) $ 1,675 $ 1,357
Total assets.............................. 954 746 1,414 1,511 2,794 3,390
Total liabilities(2)...................... 202 806 329 2,047 1,004 2,340
Shareholders' equity (deficit)............ 752 (60) 1,085 (539) 1,790 1,050
- ----------------
(1)For consistency, does not give effect to the Share Combination.
(2)At June 30, 2002, reflects the January 2002 conversion of $1 million
principal amount of secured notes of Convergence into 2,536,320 shares of its
common stock.
14
Determination of the Merger Ratio
Selection of Valuation Method. In negotiating the consideration to be
issued to shareholders of Convergence in the Merger, our Board and the board of
directors of Convergence (the "Convergence Board") relied primarily on their
separate evaluations of the Merger parties' fair market values on a going
concern basis to assess their relative contributions to the combined enterprise
and to allocate ownership of that enterprise between the two shareholder
constituencies. Both Boards selected this method because they view the Merger as
a combination of two on-going enterprises with distinct contributions rather
than a traditional acquisition. Accordingly, they agreed that a premium to
either party's investors would be inappropriate. The fact that neither Board
considered the Merger parties to have equal fair market values on a going
concern basis or the same relative contribution to the combined enterprise did
not change their determinations on the appropriateness of their valuation method
or the inappropriateness of a premium to either shareholder constituency.
Our Board believes that the selected method of determining the Merger
Ratio represents a fair, reasonable and proper approach for valuing the two
enterprises. The Board acknowledges, however, that its methodology is subject to
various uncertainties and may have resulted in a valuation and resulting Merger
Ratio that would differ from independent valuations or third-party offers. See
"Risk Factors of the Merger" above and "Fairness of the Merger" below.
Application of Selected Valuation Method to Base Ten. Our Board's
deliberations on the Merger parties' relative contributions to the combined
enterprise were concentrated in the fourth quarter of 2001. In evaluating our
contribution, the Board focused on our net asset values, as reflected in our
reported shareholders' equity and working capital as of September 30, 2001,
which were each approximately $1.3 million. Both were comprised primarily of
cash and cash equivalents net of current liabilities. With our annual Reporting
Costs and other general and administrative expenses averaging approximately
$210,000 per quarter, the Board anticipated a decline in our shareholders'
equity and working capital to slightly less than $1.1 million by year end, when
negotiations on the Merger Agreement were expected to be finalized. Although our
20% interest in Almedica LLC is carried at no value for financial reporting
purposes, our Board initially attributed an enterprise value of up to $200,000
for that interest, based on its estimate of prospective cash flows over the next
three years, discounted to present value at a 10% annual rate. This increased
its fair market valuation of Base Ten to as much as $1.3 million for purposes of
establishing our overall enterprise contribution in the Merger. The Board
acknowledged that this was more than twice our market capitalization at the time
of its deliberations.
Application of Selected Valuation Method to Convergence. In its
analysis of the relative contribution by Convergence to the combined enterprise,
our Board focused on the market and revenue growth potential of its PHA offering
over the next three years to derive a fair market valuation of the enterprise
based on estimated cash flows for that period, discounted to present value at
various annual rates up to 20% to account for perceived risk profiles. Our Board
believes Convergence is positioned to reverse its history of losses and achieve
substantial growth in subscription and sponsorship fees for its e-Health
services during that period. This conclusion was premised on the Board's
assessments of both the e-Health marketplace in general and the market position
and potential of the PHA product developed by Convergence in particular. The
Board considered that the Internet platform utilized for PHA delivery presents
both access and cost containment opportunities to address the needs of this
marketplace. It also considered that this market remains relatively undeveloped
despite the increasing popularity, penetration and bandwidth of Internet
resources generally available in the workplace. Based on these factors, our
Board believes this market presents significant opportunities for Convergence.
In developing a revenue and cash flow model for Convergence, our Board
sought to balance its assessment of the market prospects for PHA services with
the risk that the potentially controversial nature of its alternative medicine
components makes its ultimate success in the marketplace uncertain. Our Board
also considered the risk that Convergence's business plan contemplates
substantial capital expenditures to fund its ongoing operations without any
assurance of deriving anticipated revenues from operations. The Board weighed
the risks of failing to raise adequate capital to finance the execution of that
business plan or acquiring capital on terms that would be highly dilutive of our
continuing investors in the combined enterprise. See "Risk Factors of the
Merger" above.
To quantify its enterprise valuation of Convergence from projected
financial performance, our Board applied market multiples of earnings before
interest, taxes and depreciation, depletion and amortization for several
publicly traded healthcare information companies to its cash flow estimates for
Convergence over the next three years. Its estimates were based on a number of
underlying assumptions that are inherently subject to varying degrees of
uncertainty.
15
Based on its discussions with management of Convergence and its market
due diligence, our Board concluded that the risk-discounted potential of
Convergence for revenue and cash flow growth over the next three years supports
a fair market valuation in a range between $2.3 million and $3.1 million. The
Board initially determined that a mid-range valuation of $2.7 million would be
consistent with its fair market valuation. Based on its initial estimates of
relative fair market values of up to $1.3 million for Base Ten based primarily
on its net asset valuation and approximately $2.7 million for Convergence based
on its enterprise valuation, our Board proposed a Merger Ratio in the range of
33% for Base Ten and 67% for Convergence.
Valuations by the Convergence Board. In its evaluation of the Merger
parties' relative contributions, the Convergence Board initially estimated
relative net contributions at approximately 23% by Base Ten and 77% by
Convergence, reflecting its valuations in the range of $685,000 for Base Ten and
$2.3 million for Convergence. The variance was primarily from different weights
placed on the capital requirements and market prospects for commercialization of
the PHA services developed by Convergence, together with lower expectations of
the Convergence Board for our retained interest in the Clinical Software assets
to be contributed to Almedica LLC.
Valuations Adopted by Both Boards. After several months of due
diligence and arms' length negotiations, the contribution ranges proposed by the
Merger parties' Boards were refined to 25% by Base Ten and 75% by Convergence.
These relative contributions formed the basis for the Merger Ratio ultimately
authorized by both Boards. They reflect estimated fair market valuations in the
range of $765,000 for Base Ten and $2.3 million for Convergence. The Base Ten
valuation reflected anticipated reduction of our cash position by the time of
the Merger but was consistent with our market capitalization based on the high
end of our trading range during 2001. See "Background of the Share Combination
Proposal - Stock Price and Volume Data" above. The Convergence valuation was
consistent with the pricing of our Convergence Series A-3 Preferred Stock
Investment at $.25 per share, which reflects a "pre-money" valuation for
Convergence of approximately $2.3 million based on its 9.3 million common and
common equivalent shares then outstanding. See "Proposed Merger with Convergence
- - Investments in Convergence" above. In accepting this compromise on the Merger
Ratio, our Board was influenced by the fact that two principal shareholders of
Convergence also purchased its Series A-3 preferred stock contemporaneously
based on the same $2.3 million valuation.
Alternatives to Selected Valuation Method. Although our Board
recognized that a liquidation analysis would likely favor Base Ten over
Convergence in view of our tangible asset base versus the intangibles underlying
an enterprise valuation of Convergence, the Board did not analyze the respective
liquidation values of the Merger parties in part because the Convergence Board
would not accept that approach and in part because it views the Merger as a
combination of two ongoing rather than liquidating enterprises. Accordingly, it
determined that reliance on estimated liquidation values in allocating ownership
of the combined enterprise between the two shareholder constituencies would be
inconsistent with the parties' status and prospects as going concerns. The Board
considered an evaluation of the Merger parties' relative contributions from
estimated fair market values on a going concern basis to be entirely consistent
with the parties' status and prospects. While the Board believes the valuation
and allocation methodology for the Merger provided an equitable basis for
allocating ownership of the combined enterprise between the two shareholder
constituencies, its evaluation required judgments on underlying assumptions that
are inherently subject to varying degrees of uncertainty. These uncertainties
could result in an undervaluation or overvaluation of either Merger party.
Reliance on other methods of valuation and allocation could have yielded
materially different results.
Reasons for the Board's Authorization of the Merger
o The Merger is intended to address our objective of redirecting our
business to a market sector requiring less capital resources,
technological development and time to market uncertainties than our MES
and Clinical Software operations. The Board believes the Merger will
achieve this objective by concentrating our remaining resources in the
emerging and potentially sizable market for electronic dissemination of
personalized medical information.
o Because our primary assets remaining after the sale of our Clinical
Software business will be cash and cash equivalents, the Merger and
related Convergence Series A-3 Preferred Stock Investment and
Convergence Loans also address Convergence's objective of securing
needed capital on acceptable terms. This enabled us to negotiate Merger
terms considered relatively favorable by our Board.
16
Alternatives to the Merger
Instead of proposing the Merger, our Board could instead continue to
seek alternative business combinations to implement its planned Business
Redirection or seek to liquidate our assets and distribute the liquidation
proceeds to our shareholders. The Board recognized that the alternative of
continuing to pursue the Business Redirection would avoid the risks associated
with the execution of Convergence's business plan and the alternative of a
liquidation would enable our shareholders to reinvest their proportionate share
of liquidation proceeds. Both alternatives were rejected based on the Board's
determination that continuing to seek alternative business combinations to
implement its planned Business Redirection would be impractical in view of our
depleting resources and that an orderly liquidation of Base Ten carried out over
a reasonable period of time would generate proceeds net of liquidation expenses
in the range between $.06 and $.08 per share, which the Board considers inferior
to the shareholder values anticipated from the Merger.
Timing of the Merger Proposal
The Merger is being proposed at this time because the Merger Agreement
requires our best efforts to obtain shareholder approval of the Proposal as
expeditiously as practicable. Including the Proposal to approve the Merger with
the other Proposals to be brought before the special meeting also saves
administrative costs that would be incurred if the Merger was proposed at a
different time.
Fairness of the Merger
Our Board did not retain a financial advisor to evaluate the fairness
of the Merger to unaffiliated holders of either class of our common stock from a
financial point of view. As a result, the Merger Ratio and other terms of the
Merger Agreement may not be as favorable as the terms that an independent
representative might have obtained. Based solely on its independent evaluation,
the Board has unanimously authorized the Merger Agreement and recommends its
approval by our shareholders based on its determination that the Merger and
related transactions contemplated by the Merger Agreement are in the best
interests of Base Ten and are fair in all respects to our existing shareholders,
including unaffiliated holders of both classes of our common stock, based on
financial as well as timing and procedural considerations. The Board considered
the factors summarized below in reaching this conclusion.
o The Merger is expected to provide benefits to our continuing
shareholders that would be unavailable from the potential alternatives
to the transaction. See "Alternatives to the Merger" above.
o By targeting an unestablished, cash constrained participant in the
emerging and potentially sizable market for electronic dissemination of
personalized medical information as our partner for implementing the
Business Redirection, our Board balanced the attendant risks against
the potential benefits of the Merger for maximizing our continuing
shareholders' investment values through partial ownership of a combined
enterprise with greater upside than their current investment in Base
Ten.
o Our Board did not seek bids for the sale of Base Ten because it
believes that continued operations through Convergence as a privately
held enterprise should be more advantageous to continuing investors.
This conclusion was based in part on the recent contraction of our
business and the corresponding decline in the market price for our
common stock, which could be expected to have an adverse impact on the
consideration to be offered by any bidder.
o The Board also considered that any active bidder for Base Ten would
likely apply a substantial discount to the value of our public company
franchise due to the delisting of our Class A common stock from the
Nasdaq Small Cap Market in December 2000. Trading in our common stock
was limited thereafter to the OTCBB. This not only reduced liquidity in
the outstanding common stock but also impaired our ability to implement
the Business Redirection with any enterprise seeking to provide its
shareholders with publicly traded securities through a business
combination. Accordingly, our Board considered the lower administrative
costs of private operations through Convergence to outweigh the limited
benefits of maintaining Exchange Act registration for an OTCBB traded
security.
17
o The Merger is being effected in accordance with all requirements under
New Jersey law and our charter. For a merger or similar transaction,
our charter requires approval from holders of three-quarters of the
votes cast on the Proposal. The Board considers this to be an unusually
stringent supermajority threshold. Our directors, officers and
principal shareholders collectively do not own sufficient shares to
assure approval of the Proposal, which therefore requires support from
a substantial portion of unaffiliated shareholders. See "Principal
Shareholders."
o Shareholders who vote against the Merger Proposal have dissenters'
rights under New Jersey law to receive the fair value of their shares
as determined by a court. See Proposal 3 - Merger with Convergence -
Dissenters' Rights."
On the cumulative import of these factors, the Board unanimously
concluded that the Merger is in the best interests of Base Ten and is fair to
our shareholders, including unaffiliated holders of both class of our common
stock, from a financial point of view. The Board unanimously recommends approval
of the Proposal by our shareholders. Each of our directors, officers and
principal shareholders has indicated an intention to vote in favor of the
Merger. See "Directors and Officers" and "Principal Shareholders.
PROPOSAL 1
Sale of Clinical Software Business
Terms of the LLC Agreement
Consideration. Subject to customary closing conditions, the LLC
Agreement provides for us to receive $75,000 in cash for our Clinical Software
business, plus a 20% interest in Almedica LLC.
Board Nominees. Upon the closing under the LLC Agreement, we will be
entitled to designate one nominee for appointment to the board of directors of
Almedica LLC. Our designee will represent a minority of that board and will have
no special leverage to influence its decisions.
Accounting Treatment. When we originally acquired the Clinical Software
products from Almedica, we recorded the assets and liabilities of the acquired
operations based on the market value of the 790,000 shares of common stock we
issued at that time. In October 2000, based on the decision by our Board to
dispose of this business, we recorded a loss on the disposition of discontinued
operations in the amount of $1.9 million. Following our sale of these
operations, our balance sheet will reflect nominal value for our 20% interest in
Almedica LLC.
Tax Consequences. There will be no material tax consequences from the
sale of our Clinical Software operations to Almedica LLC.
Regulatory Approvals and Appraisals. No federal or state regulatory
requirements or approvals will apply to the proposed sale. No report, opinion or
appraisal materially relating to the proposed sale have been obtained or relied
upon by us or the other parties to the LLC Agreement.
Almedica License. The December 2001 agreement covering the Almedica
License provides Almedica LLC with a ten-year worldwide license covering the
Clinical Software. The Almedica License is exclusive for the first year and
non-exclusive for the balance of the ten-year term. It provides for a royalty of
$75,000 payable either upon the closing under the LLC Agreement or, if
shareholder approval for the sale of our Clinical Software business is not
obtained, in ten equal installments commencing in December 2002.
Reasons for the Proposed Sale
Since our acquisition of two clinical trials software products from
Almedica in June 1999, the acquired business has generated only marginal sales.
We estimate that our efforts to commercialize the acquired software and our
internally developed Clinical Software have resulted in losses of approximately
$3 million.
18
We have limited financial, technical or marketing resources available
to develop a market for our Clinical Software products. In view of these
limitations, we anticipate that our Clinical Software business, if operated
internally, would continue to operate at a loss. Our Business Redirection calls
for our pursuit of revenue generating or strategic opportunities requiring less
capital resources, technological development and time to market uncertainties
than our discontinued Clinical Software operations. We believe it would be
impractical to continue devoting our limited resources to both the Clinical
Software business and the Business Redirection.
Description of Almedica's Business
Almedica provides clinical trials materials ("CTM") services for Phase
I-IV clinical studies. These services are subject to regulation by the U.S. Food
and Drug Administration ("FDA"). Almedica's CTM services include clinical trial
protocol development, patient-specific labeling, randomization and packaging of
clinical trial supplies to clients including pharmaceutical, biotechnology and
contract research organizations. Almedica also handles storage, distribution and
return of CTM supplies through distribution management and interactive voice
response software. The principal executive offices of Almedica are located at 75
Commerce Drive, Allendale, New Jersey, and its telephone number is (201)
995-9440.
Financial Effects of the Clinical Software Sale
In accordance with the LLC Agreement, the $75,000 purchase price for
our Clinical Software assets is being held in an escrow account pending the
closing of the transaction. Although our 20% interest in Almedica LLC is carried
at no value on our balance sheet, we have reflected the escrowed purchase price
for the Clinical Software business on our historical balance sheets as a current
asset of discontinued operations. Accordingly, in view of the discontinuation of
our Clinical Software operations in 2000 and the fact that our financial
statements as a small business issuer are not required to include operating
results for periods prior to the discontinuation of this segment, we have not
presented summary pro forma financial information in this section of the proxy
statement separartely reflecting the Clinical Software sale since the only
adjustment it would reflect to our historical financial statements for periods
after the year ended December 31, 2000 would be a change in the balance sheet
classification of the $75,000 purchase price from a "current asset of
discontinued operations" to "cash and cash equivalents." Combined pro forma
information reflecting both the Clinical Software sale and the Merger is
presented at the end of this proxy statement under the caption "Unaudited Pro
Forma Consolidated Financial Statements of Base Ten."
Risk Factors
Almedica recently formed Almedica LLC for the purpose of this
transaction. It has no operating history or current financing commitments from
Almedica, Base Ten or any third party. If Almedica LLC is unable to successfully
commercialize the acquired assets, our equity interest will have no value. Any
future financing or acquisition transactions, even if adding to Almedica LLC's
value, will dilute our equity interest. We did not retain a financial advisor to
evaluate the fairness of this transaction to our shareholders from a financial
point of view.
Prior Contacts and Agreements
In connection with our June 1999 acquisition of clinical trials
software assets from Almedica, we entered into the following arrangements with
its affiliates:
o Almedica's chairman, Clark L. Bullock, joined our Board. He served on
our Board until April 28, 2000.
o We entered into an employment agreement with Robert J. Bronstein,
former president of an Almedica subsidiary, to serve as president of
our Applications Software Division. Mr. Bronstein resigned on March 31,
2000.
o We entered into a Program License Agreement with Almedica, which
acquired a limited license for the Clinical Software products we
acquired, subject to its agreement not to compete with us in North
America for five years. We assigned all of our indemnification and
other obligations under this agreement to ABB in connection with the
sale of our MES business to ABB in October 2000. See "Background of the
Proposals - Contraction of Business."
19
o After the June 1999 acquisition, we completed software development work
for Almedica but received no payment from them on our invoiced fees
aggregating $255,000. We also failed to collect software maintenance
fees of $140,000 invoiced to Almedica.
o We had various commitments under the Program License Agreement relating
to our MES software. Although those commitments were not satisfied,
they were assumed by ABB in October 2000 in connection with its
purchase of that software.
Any claims related to these matters have been released under the LLC
Agreement.
Dissenters' Rights
Under New Jersey law, if the proposed sale of our Clinical Software
business were considered a sale of substantially all our assets other than in
the ordinary course of business, shareholders entitled to vote for its approval
would have dissenters' rights similar to those offered to shareholders in merger
and consolidation transactions. For a description of those rights, see "Proposal
3 - Merger with Convergence -- Dissenters' Rights."
Vote Required
Under New Jersey law, a sale of substantially all the assets of a
corporation organized in that State requires shareholder approval if the sale is
not in the ordinary course of business. Although we do not believe the proposed
sale of our Clinical Software business should be considered a sale of
substantially all our assets other than in the ordinary course of business, we
are seeking shareholder approval because it is required as a closing condition
under the LLC Agreement. Assuming for this purpose that the Proposal involves
the sale of substantially all our assets, our charter requires the affirmative
vote of at least three-quarters of the votes cast by the holders of Class A
common stock and Class B common stock entitled to vote at the special meeting,
voting together as a class. Our Board recommends that shareholders vote "FOR"
the proposal to sell our Clinical Software business under the terms of the LLC
Agreement.
PROPOSAL 2
Share Combination
Terms of the Share Combination
Our Board has adopted a resolution authorizing the Share Combination on
the following terms:
o Every 1,000 shares of both Class A and Class B common stock will be
combined into and exchanged for one share of the same class, and the
par value of each share will be reduced from $5.00 to $.01;
o Each holder of record of a fractional share of our common stock before
giving effect to the Share Combination will receive a cash payment in
lieu of the fractional share in an amount based on the weighted average
sale prices reported by the OTCBB for our common stock during the 20
trading days preceding the date of the special meeting;
o A certificate of amendment to our charter will be filed with the New
Jersey Department of State, providing for the foregoing steps and for
an amendment of Article 6(a) of the charter to read follows:
(a) This corporation is authorized to issue three classes of
shares of stock to be designated "Class A Common," "Class B Common"
and "Preferred." The total number of shares that this corporation is
authorized to issued is 1,268,200, and the aggregate par value of all
such shares is $12,682. Of these shares, 270,000 shall be Class A
Common, par value $0.01 each, 4,000 shall be Class B Common, par
value $0.01 each, and 994 shall be Preferred, par value $0.01 each.
20
o A Certification and Notice on Form 15 will be filed with the SEC
terminating our reporting obligations as a small business company under
the Exchange Act in anticipation of the reduction of our shareholder
base below 500 record holders.
Purpose of the Share Combination
As of the record date for the special meeting, we had a total of 1,100
record holders of our common stock. Approximately 90% of those accounts held
less than 1,000 shares. During the last half of 2001 and the first three
quarters of 2002, the bid prices of our Class A common stock quotes by the OTCBB
ranged from $.04 to $.11 per share. Based on a weighted average share price of
approximately $.05 per share for that period, a median Small Account of 500
shares had a market value of $25.00. We estimate that our annual costs for
transfer agent, legal and accounting services associated with our reporting and
related obligations as a publicly held small business company are approximately
$120,000. This translates to over $100 per record holder account, which far
exceeds the average market value of the median Small Account.
Since reporting companies are entitled to terminate their Exchange Act
registration if their shareholder base has declined below 500 holders of record
(or below 300 if the issuer has total assets in excess of $10 million), the
Board authorized the Share Combination to achieve that result. By enabling us to
terminate our Exchange Act registration, the Share Combination is intended to
eliminate our Reporting Costs so all of our limited financial resources net of
costs for fractional share repurchases can be applied to execution of the
Convergence business plan.
Reasons for the Board's Authorization of the Share Combination
Our Board has unanimously authorized the Share Combination and
recommends its approval by our shareholders based on its determination that
cashing out the Small Accounts and terminating our Exchange Act registration is
in the best interests of Base Ten and is fair to our existing shareholders in
all respects, including financial, timing and procedural considerations. The
Board considered the factors summarized below in reaching this conclusion.
o In view of the limited market for our common stock following its
delisting from the Nasdaq SmallCap Market in December 2000, our Board
believes the advantages usually associated with a public company
franchise have been substantially undercut by the downturn in our
business and the resulting loss of market value and liquidity in our
common stock. The Board considers whatever advantages remain in our
public company franchise to be overwhelmingly outweighed by the
Reporting Costs.
o The Convergence Board not only concurred with this conclusion but
conditioned its willingness to complete the Merger on the termination
of our small business company registration under the Exchange Act.
o The Board also considered that holders of Small Accounts will benefit
from our repurchase of their fractional shares at market value without
incurring any transaction or administrative costs. We intend to use the
weighted average sale prices reported by the OTCBB for our Class A
common stock during the 20 trading days preceding the date of the
special meeting as the basis for determining the repurchase price for
fractional shares resulting from the Share Combination.
Tax Consequences
Each shareholder receiving a cash payment in lieu of a fractional share
resulting from the Share Combination will generally recognize capital gain or
loss equal to the difference between the amount of the cash payment and the tax
basis in the fractional share.
Risk Factors
After the Share Combination, there will be no established trading
market for our common stock, and our continuing shareholders will have no
liquidity in their investment. Although regulations under the Exchange Act
establish procedures for brokers to issue quotations on securities of
non-reporting companies that provide the broker with specified business and
financial information, we do not expect the reconstituted Board to authorize the
preparation or dissemination of that information, and the Parent Company will
have no obligation to do so after the Merger.
21
Fairness of the Share Combination
Financial Fairness Overview. Our Board believes the Share Combination
as a whole is in the best interests of Base Ten and is fair to our shareholders,
including holders of Small Accounts, from a financial point of view. It reached
this conclusion based solely on its own evaluation. It did not retain an
investment bank or other financial adviser to render a report or opinion on the
fairness of the Share Combination from a financial point of view.
Advantages and Disadvantages. In evaluating the financial fairness of
the Proposal, our Board weighed the advantages to our shareholders and our
business usually associated with a public company franchise against the
disadvantages of public reporting obligations. The Board considered that the
typical public company advantages of increased liquidity for shareholders and
increased access to capital markets for the issuer have been negated by the loss
of market value and liquidity in our common stock from the downturn in our
business and delisting of our shares. The Board weighed this against the
competitive disadvantages and management burdens of public reporting
obligations. The Board also considered that our repurchase of fractional shares
in the Share Combination will provide liquidity to holders of Small Accounts as
well as eliminating the transaction and administrative costs they would
otherwise incur to liquidate their Small Accounts. The Board was also influenced
by the fact that our annual Reporting Costs per record holder account are more
than four times the value of a median Small Account based on the current market
price of our common stock.
Fairness of Cash Out Price. As part of its evaluation, the Board
focused on the fairness of the Share Combination to holders of Small Accounts.
Under the terms of the Share Combination, holders of fewer than 1,000 current
shares of our common stock will receive cash in lieu of fractional shares
resulting from the proposed 1-for-1,000 reverse stock split in an amount per
current share equal to the weighted average sale prices reported by the OTCBB
for our common stock during the 20 trading days preceding the date of the
special meeting, Although the Board considered its use of prevailing market
price as the most appropriate measure of value for the fractional shares to be
held in Small Accounts, it recognized that our common stock is thinly traded,
with a relatively wide spread between the bid and asked price, which it
attributes to the limited number of market makers on the bid side.
Alternative Cash Out Price Based on Book Value. In determining to rely
on prevailing market price for the cash out value of Small Accounts, the Board
considered that the weighted average sale price of $.05 per share reported by
the OTCBB for our Class A common stock during the second quarter of 2002
reflects a substantial discount to our net book value of $.14 per share at June
30, 2002. Although the ultimate cash out price may change based on trading
prices for our common stock during the 20 trading days preceding the special
meeting, the Board acknowledges that this disparity weights against the fairness
of the Share Combination to holders of Small Accounts. The Board also recognizes
that the $.09 per share disparity translates to $45 for a median Small Account
of 500 current shares, which it does not regard as material, compared to a
potential $50,000 increase in our total cash out cost, which it regards as
material in view of our limited financial resources. The Board concluded that
any potential inequity to holders of Small Accounts from this aspect of the
Share Combination is mitigated by the absence of brokerage commissions and
administrative inconvenience they would otherwise incur to cash out their
investment.
Alternative Cash Out Price Based on Going Concern Value or Earnings.
While the Board expects Base Ten to continue as a going concern through its
proposed Merger with Convergence, the downturn and contraction of our business
makes it difficult in the Board's view to assess our going concern value for
purposes of determining an alternative cash out price for fractional shares held
in Small Accounts as a result of the Share Combination. Although an evaluation
of going concern value would ordinarily focus on publicly available data on
companies in the same industry sector, our Business Redirection has entailed the
sale of our MES business and the proposed sale of our Clinical Software
business, which represents our only remaining line of business. Accordingly, the
Board determined that any effort to apply this traditional valuation method
would be inappropriate under current circumstances. The absence of any
contemporary earnings history also make any alternative valuation of Small
Accounts equally inappropriate in the Board's view.
22
Alternative Cash Out Price Based on Liquidation Value. After accounting
for the sale of our Clinical Software business, our primary assets are cash and
cash equivalents of $418,000 as of June 30, 2002 and our Convergence Series A-3
Preferred Stock Investment of $290,000. See "Proposed Merger with Convergence"
above. Since June 30, 2002, our cash position has declined primarily from our
initial Convergence Loan of $125,000 and our Reporting Costs, including
additional professional fees in connection with the special meeting. After
accounting for these developments, the Board estimates that an orderly
liquidation of Base Ten carried out over a reasonable period of time would
generate proceeds net of liquidation expenses in the range between $.06 and $.08
per share. The Board acknowledges that, like its alternative book value
analysis, the disparity with our current market price of $.05 per common share
weights against the fairness of the Share Combination to holders of Small
Accounts, although it does not view the disparity as material and does not
consider its liquidation analysis as necessarily indicative of actual
liquidation results.
Financial Fairness - Conclusion. In reaching its conclusion on the
financial fairness of the Share Combination, the Board did not assign any
specific weights to the foregoing factors. On the cumulative import of those
factors, the Board unanimously concluded that the Share Combination as a whole
is in the best interests of Base Ten and is fair to our shareholders, including
holders of Small Accounts, from a financial point of view. In selecting a
valuation method for the cash out of Small Accounts, the Board concluded that a
market based valuation was more appropriate than reliance on net book value,
going concern value or liquidation value in view of the limited relevance of
each alternative. The Board unanimously recommends approval of the Proposal by
our shareholders. Each of our directors, officers and principal shareholders has
indicated an intention to vote in favor of the Share Combination. See "Directors
and Officers" and "Principal Shareholders.
Procedural Fairness. The Board did not appoint an independent
committee, engage an independent representative or retain an investment bank or
other financial adviser to represent the interests of Small Account holders or
other unaffiliated holders of either class of our common stock in negotiating
the terms of the Share Combination. The Board considered several alternative
transaction structures to accomplish a reduction in our shareholder base below
300 record accounts but unanimously opted for the Share Combination as the
simplest and least expensive approach. The Board considered but rejected a
structure requiring approval not only from holders of a majority of our
outstanding shares but also from a majority of unaffiliated shareholders.
Despite the absence of an independent committee, representative or appraisal and
the lack of a separate voting requirement for approval from unaffiliated
shareholders, the Board concluded that the Share Combination is not only
substantively fair but also procedurally fair to unaffiliated holders of both
classes of our common stock for the following reasons:
o The cash out price for our repurchase of fractional shares from Small
Accounts will be determined by using the weighted average per share
trading price of our common stock during the 20 trading days after the
mailing of this proxy statement. During that period, present
shareholders, including holders of Small Accounts, will have an
opportunity both to evaluate all of the Proposals and to compare the
potential value of their investment in our common stock with other
available investments.
o While remaining unaffiliated shareholders will benefit from a projected
increase in our net book value per share, the increase will be offset
by the reduction in available information about Base Ten and a
significant loss of liquidity in both classes of our common stock
following the termination of our reporting obligations under the
Exchange Act.
o Although holders of Small Accounts will be entitled to receive
immediate cash consideration for their shares, remaining shareholders
will bear the burden of the expenses of the going private transaction,
with no assurance when, if and for how much they will be able to
liquidate their investments in our common stock.
o The Share Combination is being effected in accordance with all
requirements under New Jersey law and our charter, which require the
affirmative votes from the holders of a majority of our common stock
outstanding on the record date. As of that date, our officers and
directors as a group do not own a sufficient number of shares to assure
approval of the Proposal, although our two principal shareholders,
Almedica and Jesse Upchurch can determine the outcome of the
shareholder vote. See "Principal Shareholders."
o Between the date of this proxy statement and the effective date of the
Share Combination, all of our shareholders will have an opportunity to
adjust the number of our common shares they will own on the effective
date so that holders who would otherwise be cashed out can become
continuing holders and holders of more than 1,000 shares can divide or
otherwise adjust their holdings into Small Accounts that will be cashed
out.
23
Conduct of Business after the Share Combination
If the Share Combination is approved, we plan to immediately terminate
our registration as a small business reporting company under the Exchange Act.
This will eliminate our obligation to furnish financial and other information to
remaining shareholders in annual reports on Form 10-KSB, quarterly reports on
Form 10-QSB, current reports on Form 8-K and proxy statements on Schedule 14A.
By eliminating this obligation, we expect to save approximately $120,000 in
annual Reporting Costs. Terminating our Exchange Act registration will also
relieve our officers, directors and principal shareholders of various filing
obligations under the Exchange Act. Because we will cease filing periodic
reports under the Exchange Act, our common stock will not be eligible for
quotations on the OTCBB or any other established trading market. This will
adversely affect the liquidity of our common stock, which in turn could impair
its value in private resale transactions. The absence of a trading market for
our common stock could also limit our access to equity capital. since potential
investors may be deterred by the inability to readily liquidate their
investment. See "Special Factors - Effects of the Share Combination."
Dissenters' Rights
Under New Jersey law, holders of fractional shares to be exchanged for
cash by a New Jersey corporation engaging in a share combination transaction
have the right to dissent and have their fractional shares purchased by the
corporation at their fair market value. Since we will be paying cash for
fractional shares in the Share Combination at their market price at the time of
the transaction, we believe any exercise of dissenters' rights would have no
effect on the amount of cash to be received by any dissenting shareholder in
lieu of a fractional share.
Our shareholders who object to the Share Combination may nevertheless
dissent and have their shares purchased by the Parent Company at fair value. The
procedures that must be followed to assert and enforce dissenters' rights under
the New Jersey statute governing these rights are summarized below. Upon
request, we will provide any dissenting shareholders with a copy of the statute.
To exercise dissenters' rights, a dissenting shareholder must file with
us, in time to be received before the special meeting, a written notice of
dissent (a "Notice of Intent") indicating an intent to demand payment for his
shares if the Share Combination is consummated. The Notice of Intent must either
be submitted to us at the special meeting or mailed to us not less than three
business days before the special meeting, at our current offices located at 535
East County Line Road, Suite 16, Lakewood, New Jersey 08701, to the attention of
Kenneth W. Riley, Chief Financial Officer, Base Ten Systems, Inc. A dissenting
shareholder must also vote against the Share Combination or abstain from voting,
and the dissent must apply to all the shares of our common stock owned by the
dissenting shareholder.
If the Share Combination is approved and consummated, the Parent
Company must send each dissenting shareholder, within 10 days after the
effective date of the Share Combination, a written notice (a "Dissenters'
Notice") confirming the effective date. Within 20 days after the Dissenters'
Notice is mailed, a dissenting shareholder must respond by sending us a written
demand for payment of the fair value of his shares (the "Payment Demand"). Since
we will be relocating after the Share Combination to 774 Mays Boulevard, Suite
386, Incline Village, Nevada 89451, the Payment Demand should be sent to us at
that address, to Convergence Systems, Inc., 774 Mays Boulevard, Suite 396,
Incline Village, Nevada 89451, Attention: President.
Within 20 days after making a Payment Demand, a dissenting shareholder
must submit to us all stock certificates representing his shares. Upon receipt,
we will mark the certificates to reflect the demand and return them to the
dissenting shareholder. A dissenting shareholder who has made a Payment Demand
will thereafter be entitled only to payment for his shares and will not be
entitled to vote or exercise any other shareholder rights. A dissenting
shareholder may not withdraw a Payment Demand without our written consent. When
we communicate with any dissenting shareholders, we must inform them of the
deadlines for any actions they are required to take in order to perfect their
dissenters' rights. Merely voting against the Share Combination or abstaining
from voting will not satisfy the procedural requirements for perfecting
dissenters' rights.
Within 10 days after the deadline for submitting Payment Demands, the
Parent Company will mail to each dissenting shareholder its financial statements
at and for a twelve-month period ended on the latest practicable date. The
transmittal letter must indicate whether we have elected to pay dissenting
shareholders the fair value of their shares. If so, it must specify the price we
have determined as the fair value of those shares. Within 30 days after the
deadline for submitting Payment Demands (the "Settlement Window"), we must make
payment of that fair value for all the shares of each dissenting shareholder who
accepts our valuation and submits his stock certificates for cancellation.
24
If a dissenting shareholder does not accept our valuation within the
Settlement Window, he may serve us with a written demand to commence an action
in the New Jersey Superior Court for the court's determination of the fair value
of his shares. The demand must be served within 30 days after the expiration of
the Settlement Window. Not later than 30 days after our receipt of the demand,
we must commence the requested action. If we fail to do so, a dissenting
shareholder may commence the action in our name not later than 60 days after the
expiration of the time allotted for us to commence the action.
In any action to determine the fair value of our common stock, all
dissenting shareholders who have not accepted our valuation within the
Settlement Window will be parties to the action. The court may appoint an
appraiser to receive evidence and report to the court on its evaluation of fair
value. The court will determine the appraiser's powers and, based on its
evaluation, will render a judgment against the Parent Company in favor of each
shareholder in the action for the fair value of his shares, as determined by the
court, together with an allowance for interest at a rate set by the court from
the applicable Payment Demand to the day of payment. The judgment will be
payable to a dissenting shareholder upon surrender to the Parent Company of the
certificates representing his shares.
The costs and expenses of any action for determining the fair value of
dissenters' shares, including reasonable compensation for and expenses of any
appraiser, will be determined by the court and apportioned and assessed as the
court determines. Fees and expenses of counsel and of experts for the parties to
the action may be assessed against the Parent Company if the court deems an
assessment to be equitable, but only if the court finds that our offer of
payment was not made in good faith or if we failed to make a payment offer.
The right of any dissenting shareholder to be paid the fair value of
his shares will terminate if (1) he fails to present the certificates
representing his shares for notation, unless a court directs otherwise, (2) the
Payment Demand is withdrawn by the dissenting shareholder with our written
consent, (3) we come to an agreement with the dissenting shareholder on the fair
value of his shares, (4) the New Jersey Superior Court determines that the
shareholder is not entitled to payment for his shares, (5) the Share Combination
is abandoned or rescinded or (6) a court having jurisdiction permanently enjoins
or sets aside the Share Combination. In any of those events, a dissenting
shareholder's rights as a shareholder will be reinstated as of the date of his
Payment Demand without prejudice to any corporate action that has taken place in
the interim, and the shareholder will be entitled to receive any intervening
preemptive rights and payment of any intervening dividend or other distribution.
Vote Required
Under New Jersey law, the Share Combination requires the affirmative
vote by holders of majority of the Class A and Class B common stock entitled to
vote at the special meeting, voting together as a class. Our Board recommends
that the shareholders vote "FOR" the proposed Share Combination.
PROPOSAL 3
Merger with Convergence
General
The following summary of the Merger Agreement and description of the
risks and reasons for the Merger should be read together with the summary of
Convergence's business and financial data included elsewhere in this proxy
statement. See "Business of Convergence." For convenience, since Convergence
will be our wholly owned subsidiary after the Merger, we use the term "Parent
Company" in this proxy statement to mean Base Ten after completion of the Share
Combination, the Reincorporation and name change and the Merger.
Terms of the Merger Agreement
The Merger. If the Merger Agreement is approved by the parties'
shareholders and the other conditions to closing are satisfied, the Merger Sub
will merge into Convergence, which will become a wholly owned subsidiary of the
Parent Company. At the time of the Merger, the outstanding capital stock of
Convergence will be converted into the Merger Shares, which will represent 75%
of the Parent Company's outstanding common stock (the "Merger Ratio") after
giving effect to our repurchase of fractional shares in the Share Combination.
See "Proposal 2 - Share Combination."
25
Based on the Merger Ratio and our estimated common shares outstanding
after the Share Combination, each outstanding share of Convergence capital stock
outstanding at the time of the Merger will be converted into 0.0019608 Merger
Shares (the "Merger Conversion Rate"). The Merger Shares will be issued to the
shareholders of Convergence without registration under the Securities Act of
1933 (the "Securities Act") in reliance on the exemption provisions of
Regulation D under the Securities Act. The shareholders of Convergence will be
requested to provide us with representation letters to the effect that they are
"accredited investors" for purposes of the private placement exemption under
Regulation D or are otherwise qualified to participate in a private placement.
Outstanding Derivative Securities of Convergence. At the time of the
Merger, options and warrants previously issued by Convergence to its employees
and consultants will be converted at the Merger Conversion Rate into five-year
warrants to purchase a total of 3,873 shares of our Class A common stock at
exercise prices ranging from $5.21 to $1,302.76 per share. If fully exercised,
the issued shares will represent 16.22% of our outstanding common stock after
giving effect to the Share Combination and the issuance of the Merger Shares.
Under the terms of the Merger Agreement, any other unexercised stock options or
warrants for Convergence capital stock and securities convertible into
Convergence capital stock outstanding at the time of the Merger will terminate,
and the shares we acquired in the Convergence Series 3-A Preferred Investment
will be cancelled.
Outstanding Derivative Securities of Base Ten. We currently have
outstanding options and warrants issued to our employees and consultants
exercisable for a total of 629,791 shares of our Class A common stock at
exercise prices ranging from $.6875 to $90 per share. As adjusted for the Share
Combination, the options and warrants will be exercisable to purchase a total of
629 shares of our Class A common stock at exercise prices ranging from $687.50
to $90,000.00 per share. If fully exercised, the issued shares will represent
3.08% of the Parent Company's outstanding common stock after giving effect to
the Share Combination and the issuance of the Merger Shares. Under the terms of
the Merger Agreement, any other unexercised stock options or warrants for our
capital stock and securities convertible into our capital stock outstanding at
the time of the Merger will terminate.
New Warrants. The Merger Agreement provides for our issuance of
warrants at the time of the Merger to persons who facilitated the transaction
(the "Merger Warrants"). The Merger Warrants will be exercisable for five years
to purchase a total of 2,726 shares of our common stock (the "Warrant Shares")
at an exercise price of $.001 per share. The number of Warrant Shares was
increased by 909 shares in a February 2002 amendment to the Merger Agreement,
which allocates the additional Merger Warrants to Andrew Sycoff in recognition
of his contributions to Base Ten. See "Board Reconstitution" and "Issuance of
Merger Warrants to Designees" below. If all the Merger Warrants are exercised,
the issued shares will represent 12% of the Parent Company's outstanding common
stock after giving effect to the Share Combination and the issuance of the
Merger Shares, effectively reducing the stake of our continuing shareholders
after the Merger from 25% to 22% of the Parent Company's outstanding common
stock.
New Option Plan. The Merger Agreement provides for our adoption of a
new stock option plan covering a total of 4,100 shares of our common stock,
representing 17% of the Parent Company's outstanding common stock after giving
effect to the Share Combination and the issuance of the Merger Shares. See
"Proposal 5 - 2002 Stock Option Plan."
Accounting Treatment. We will account for the Merger under the purchase
method. Because the Merger will be treated as a purchase of Base Ten by
Convergence for accounting purposes, our consolidated balance sheet after the
Merger will reflect the assets acquired in the Merger based on their book value
at the time of the Merger, without any step up to reflect their valuation in
determining the Merger Ratio.
Tax Consequences. We expect the Merger to qualify as a tax-free
reorganization under Section 368(a)(1)(A) of the Internal Revenue Code. There
will be no material tax consequences from the Merger to our continuing
shareholders.
Regulatory Approvals and Appraisals. No federal or state regulatory
requirements or approvals will apply to the Merger proposed sale. No report,
opinion or appraisal relating to the Merger has been obtained or relied upon by
us or the other parties to the Merger Agreement.
26
Board Reconstitution. In view of the controlling interest in Base Ten
to be acquired by the shareholders of Convergence in the Merger, the Merger
Agreement provides for the current members of our Board and the board of
directors of Convergence (the "Convergence Board") to resign at the time of the
Merger and appoint five designees (the "Board Designees"), of whom two were
selected by of our Board and three by the Convergence Board. Although
shareholder approval of the Board Reconstitution is not among the Proposals, the
following summary of the business experience and background of the Designees is
provided in accordance with Rule 14f-1 under the Exchange Act.
BASE TEN DESIGNEES
Andrew G. Sycoff, age 35, was appointed to our Board in October 2000
for a term expiring at the 2002 annual meeting of shareholders. See "Directors
and Officers." He has also served on the board of directors of Paragon
Industries Corp. since 1999. Since 1992, Mr. Sycoff has been President, Chief
Executive Officer and Chairman of the Board of Andrew Garrett Inc., an
investment bank and full service brokerage firm located in New York City, as
well as Chief Executive Officer and Co-Chairman of the Board of Andrew Garrett
Trading, Inc., a trading and Nasdaq market making firm. He previously held
branch manager positions with Shamrock Partners and Paulson Securities. Mr.
Sycoff has also held senior management and consulting positions within the real
estate industry.
Edward A. Holmes, age 48, is the President and Chief Financial Officer
of MSI of Central Florida, Inc. and the Executive Vice President and Chief
Financial Officer of its parent company, Paragon Industries Corporation, both of
which are in the electronics contract manufacturing business. Prior to joining
Paragon in 1999, he served as Costs and Contracts Manager of Base Ten,
commencing in 1995. During that time, he was part of the team that completed the
turnaround and sale of its GTD business. Mr. Holmes has also held fiscal
management and controller positions with firms in the healthcare and
construction industries, prior to which he was an active stockbroker in the
1980s with two Wall Street firms. He received a BS degree in Finance and a BA
degree in Business-Accounting from the Richard Stockton College of New Jersey.
CONVERGENCE DESIGNEES
Byron Gehring, age 39, is the Chief Executive Officer of Convergence.
Prior to co-founding Convergence in March 2000, he was the President and
principal shareholder of Loan Eagle Strategies, Inc., a financial advisory
boutique whose clients included Convergence Health, Inc., the predecessor
company of Convergence (the "Convergence Predecessor"). See "Business of
Convergence - Background.." In 1991, Mr. Gehring co-founded Applied Computer
Technologies, Inc. and served as the Executive Vice President of Strategic
Resource Solutions Inc., technology companies he operated until their sale in
1999. From 1985 to 1991, he was European Sales and Service Director with
Devron-Hercules and Measurex, providers of process automation and control
systems to the paper industry. Mr. Gehring received a BS degree in Chemical
Engineering from Oregon State University and a B.A. in German from the
University of Stuttgart.
Kenneth Waltzer, M.D., M.P.H., age 43, is the Chief Medical Officer and
a co-founder of Convergence. He was the Chief Executive Officer of the
Convergence Predecessor, which he founded in 1997. From 1990 to 1997, Dr.
Waltzer served in various capacities with Kaiser-Permanente, where he was the
first Preventive Care Coordinator for Southern California. While at Kaiser, he
was also Director of Medical Education at the West Los Angeles Medical Center.
During his tenure, he helped develop statewide guidelines for preventive care.
Dr. Waltzer received a B.A. cum laude from Harvard College, an M.D. from Baylor
College of Medicine and an M.P.H. in Health Policy and Management from the
Harvard School of Public Health. He completed an internship and residency in
Primary Care Internal Medicine at The Cambridge Hospital of Harvard Medical
School and is a board-certified Internist and Geriatrician.
Jasna Gehring, age 40, has worked with Byron Gehring in their previous
business ventures in various capacities, including executive management,
administrative functions and various board functions. She has also served in
various managerial capacities with several chain restaurants in Germany. Ms.
Gehring is multilingual and received a degree in Economics from the University
of Osijek. She is the wife of Byron Gehring.
Issuance of Merger Warrants to Designees. The Merger Agreement provides
for the allocation of 70.83% of the Merger Warrants to three of the Designees.
See "New Warrants" above. The following table shows the number of Warrant Shares
covered by their Merger Warrants and the percentage of our outstanding common
stock those shares will represent after giving effect to the Share Combination
and the issuance of the Merger Shares.
27
Warrant Shares Post-Merger
Designee Covered Percentage
-------- ------- ----------
Byron Gehring 511 2.25%
Kenneth Waltzer 284 1.25
Andrew Sycoff 1,136 5.00
Conditions to Closing by Base Ten. Our obligation to consummate the
Merger is subject to various conditions, including:
o Approval of the Merger Agreement by the shareholders of Convergence,
and absence of any legal or regulatory impediment to our consummation
of the Merger;
o No breach of the covenants or representations and warranties of
Convergence in the Merger Agreement;
o Absence of any event or condition that had or would likely have a
material adverse effect on the operations, prospects or financial
condition of Convergence; and
o Delivery of the PHA developed by Convergence to at least one
unaffiliated sponsor or other subscriber organization under a binding
agreement providing for license or subscription fees at fair value for
the contract period (the "Performance Condition").
Conditions to Closing by Convergence. The obligation of Convergence to
consummate the Merger is also subject to various conditions, including:
o Approval of the Merger Agreement by our shareholders, and absence of
any legal or regulatory impediment to the consummation of the Merger
by Convergence;
o No breach of our covenants or representations and warranties in the
Merger Agreement;
o Absence of any event or condition that had or would likely have a
material adverse effect on our operations, prospects or financial
condition;
o Reconstitution of the Boards with the Designees;
o Implementation of the Share Combination;
o Termination of our reporting obligations under the Exchange Act in
anticipation of our reduced shareholder base from the Share
Combination; and
o Retention of cash and cash equivalents of at least $400,000, less the
amount of all outstanding Convergence Loans.
Closing
The Merger will become effective when a certificate of merger is filed
with the Secretary of State of the State of Nevada in accordance with applicable
law. The certificate of merger will be filed as promptly as practicable after we
have obtained shareholder approval for the Proposals, implemented the Share
Combination, terminated our registration as a reporting small business company
under the Exchange Act and reincorporated in Nevada, provided that the other
conditions to the parties' obligations under the Merger Agreement have been
satisfied or waived where permitted.
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Termination of the Merger Agreement
The Merger Agreement provides for the following remedies if terminated
under the circumstances listed below:
Terminating Party Reason for Termination Remedy of Terminating Party
- ----------------- ---------------------- ---------------------------
Base Ten Failure of Convergence to Reimbursement of our
satisfy the Performance transaction costs up to
Condition $100,000 and right to have
Byron Gehring purchase
69% of our Convergence Series
A-3 Preferred Stock Investment
for $100,000
Base Ten Failure of Convergence to Reimbursement of our
satisfy any of its other transaction costs up to $100,000
closing conditions
Convergence Failure of Base Ten to satisfy Contemporaneous repurchase
its closing condition 69% of the Convergence Series
relating to absence of A-3 Preferred Stock Investment
material adverse developments for $100,000
Convergence Completion of financing by Contemporaneous repayment of
Convergence and failure of Base all Covergence Loans,
Ten to satisfy any of its repurchase of all Convergence
closing conditions Series A Preferred Stock
Investment for $290,000 and
reimbursement of our
transaction costs up to $100,000
Under all other circumstances, a termination of the Merger Agreement
will be without liability to the terminating party as long as that party had
satisfied its own closing conditions. Except for the limited put and call rights
noted above, we would likely be unable after a termination of the Merger
Agreement to liquidate our Convergence Series A-3 Preferred Stock Investment,
which could be expected to have little or no value.
Business of Convergence
Convergence is a web-based healthcare information company organized in
March 2000 to develop interactive resources for assisting people make healthy
lifestyle decisions informed by exposure to alternative and preventative as well
as traditional healthcare options. As an initial product offering, Convergence
has developed its PHA product offering to be deployed with large corporate
health plan sponsors for use by their employees participating in those plans.
Convergence has designed the PHA as an engaging and entertaining collection of
interactive assessments, programs and multimedia content. Each PHA site offers
its users a personalized view of their health and lifestyle, coupled with
multidisciplinary options for understanding and addressing their health
concerns. See "Business of Convergence."
By encouraging adoption of wellness lifestyles that can increase
productivity and reduce healthcare costs, Convergence believes its PHA offers
tangible benefits both to sponsors and end users. With only marginal sales to
date, however, proof of this concept is highly uncertain. See "Special Factors -
Risk Factors of the Merger." The principal executive offices of Convergence are
located at 774 Mays Boulevard, Suite 386, Incline Village, Nevada 89451, and its
telephone number is (775) 832-6632. Base Ten will relocate to this address upon
completion of the Merger.
Determination of the Merger Ratio
In determining the Merger Ratio, our Board and the Convergence Board
relied primarily on their separate evaluations of the Merger parties' fair
market values on a going concern basis to assess their relative contributions to
the combined enterprise and to allocate ownership of that enterprise between the
two shareholder constituencies. Our Board believes that the selected method of
determining the Merger Ratio represents a fair, reasonable and proper approach
for valuing the two enterprises. The Board acknowledges, however, that its
methodology is subject to various uncertainties and may have resulted in a
valuation and resulting Merger Ratio that would differ from independent
valuations or third-party offers. See "Special Factors - Risk Factors of the
Merger," "- Determination of the Merger Ratio" and "Fairness of the Merger"
below.
29
Reasons for the Board's Authorization of the Merger
Our Board has unanimously authorized the Merger Agreement and
recommends its approval by our shareholders based on its determination that the
Merger and related transactions contemplated by the Merger Agreement are in the
best interests of Base Ten and are fair to our existing shareholders in all
respects, including financial, timing and procedural considerations. The Board
considered the factors summarized below in reaching this conclusion.
o The Merger is intended to address our objective of redirecting our
business to a market sector requiring less capital resources,
technological development and time to market uncertainties than our MES
and Clinical Software operations. The Board believes the Merger will
achieve this objective by concentrating our remaining resources in the
emerging and potentially sizable market for electronic dissemination of
personalized medical information.
o Because our primary assets remaining after the sale of our Clinical
Software business will be cash and cash equivalents, the Merger and
related Convergence Series A-3 Preferred Stock Investment also address
Convergence's objective of securing needed capital on acceptable terms.
This enabled us to negotiate Merger terms considered relatively
favorable by our Board.
Fairness of the Merger
We did not retain a financial advisor to evaluate the fairness of the
Merger Ratio or other aspects of the transaction to unaffiliated holders of
either class of our common stock from a financial point of view. See "Special
Factors - Risk Factors of the Merger" and "Determination of Merger Ratio" above.
As a result, the Merger Ratio and other terms of the Merger Agreement may not be
as favorable as the terms that an independent representative might have
obtained. Based solely on its independent evaluation, the Board has unanimously
authorized the Merger Agreement and recommends its approval by holders based on
its determination that the Merger and related transactions contemplated by the
Merger Agreement are in the best interests of Base Ten and are fair in all
respects to our existing shareholders, including unaffiliated holders of both
classes of our common stock, including financial as well as timing and
procedural considerations. The Board considered the factors summarized below in
reaching this conclusion.
o The Merger is expected to provide benefits to our continuing
shareholders that would be unavailable from the potential alternatives
to the transaction. See "Special Factors - Alternatives to the Merger."
o By targeting an unestablished, cash constrained participant in the
emerging and potentially sizable market for electronic dissemination of
personalized medical information as our partner for implementing the
Business Redirection, our Board balanced the attendant risks against
the potential benefits of the Merger for maximizing our continuing
shareholders' investment values through partial ownership of a combined
enterprise with greater upside than their current investment in Base
Ten.
o Our Board did not seek bids for the sale of Base Ten because it
believes that continued operations through Convergence as a privately
held enterprise should be more advantageous to continuing investors.
This conclusion was based in part on the recent contraction of our
business and the corresponding decline in the market price for our
common stock, which could be expected to have an adverse impact on the
consideration to be offered by any bidder.
o The Board also considered that any active bidder for Base Ten would
likely apply a substantial discount to the value of our public company
franchise due to the delisting of our Class A common stock from the
Nasdaq Small Cap Market in December 2000. Trading in our common stock
was limited thereafter to the OTCBB. This not only reduced liquidity in
the outstanding common stock but also impaired our ability to implement
the Business Redirection with any enterprise seeking to provide its
shareholders with publicly traded securities through a business
combination. Accordingly, our Board considered the lower administrative
costs of private operations through Convergence to outweigh the limited
benefits of maintaining Exchange Act registration for an OTCBB traded
security.
30
o The Merger is being effected in accordance with all requirements under
New Jersey law and our charter. For a merger or similar transaction,
our charter requires approval from holders of three-quarters of the
votes cast on the Proposal. The Board considers this to be an unusually
stringent supermajority threshold. Our directors, officers and
principal shareholders collectively do not own sufficient shares to
assure approval of the Proposal, which therefore requires support from
a substantial portion of unaffiliated shareholders. See "Principal
Shareholders."
o Shareholders who vote against the Merger Proposal have dissenters'
rights under New Jersey law to receive the fair value of their shares
as determined by a court. See "Dissenters' Rights" below.
On the cumulative import of these factors, the Board unanimously
concluded that the Merger is in the best interests of Base Ten and is fair to
our shareholders, including unaffiliated holders of both classes of our common
stock, from a financial point of view. The Board unanimously recommends approval
of the Proposal by our shareholders. Each of our directors, officers and
principal shareholders has indicated an intention to vote in favor of the
Merger. See "Directors and Officers" and "Principal Shareholders.
Dissenters' Rights
Our shareholders who object to the Merger will have the right under New
Jersey law to dissent and have their shares purchased by the Parent Company at
fair value. The procedures that must be followed to assert and enforce
dissenters' rights under the New Jersey statute governing these rights are
summarized below. Upon request, we will provide any dissenting shareholders with
a copy of the statute.
To exercise dissenters' rights, a dissenting shareholder must file with
us, in time to be received before the special meeting, a written notice of
dissent (a "Notice of Intent") indicating an intent to demand payment for his
shares if the Merger is consummated. The Notice of Intent must either be
submitted to us at the special meeting or mailed to us not less than three
business days before the special meeting, at our current offices located at 535
East County Line Road, Suite 16, Lakewood, New Jersey 08701, to the attention of
Kenneth W. Riley, Chief Financial Officer, Base Ten Systems, Inc. A dissenting
shareholder must also vote against the Merger or abstain from voting, and the
dissent must apply to all the shares of our common stock owned by the dissenting
shareholder.
If the Merger is approved and consummated, the Parent Company must send
each dissenting shareholder, within 10 days after the effective date of the
Merger, a written notice (a "Dissenters' Notice") confirming the effective date.
Within 20 days after the Dissenters' Notice is mailed, a dissenting shareholder
must respond by sending us a written demand for payment of the fair value of his
shares (the "Payment Demand"). Since we will be relocating after the Merger to
774 Mays Boulevard, Suite 386, Incline Village, Nevada 89451, the Payment Demand
should be sent to us at that address, to Convergence Systems, Inc., 774 Mays
Boulevard, Suite 396, Incline Village, Nevada 89451, Attention: President.
Within 20 days after making a Payment Demand, a dissenting shareholder
must submit to us all stock certificates representing his shares. Upon receipt,
we will mark the certificates to reflect the demand and return them to the
dissenting shareholder. A dissenting shareholder who has made a Payment Demand
will thereafter be entitled only to payment for his shares and will not be
entitled to vote or exercise any other shareholder rights. A dissenting
shareholder may not withdraw a Payment Demand without our written consent. When
we communicate with any dissenting shareholders, we must inform them of the
deadlines for any actions they are required to take in order to perfect their
dissenters' rights. Merely voting against the Merger or abstaining from voting
will not satisfy the procedural requirements for perfecting dissenters' rights.
Within 10 days after the deadline for submitting Payment Demands, the
Parent Company will mail to each dissenting shareholder its financial statements
at and for a twelve-month period ended on the latest practicable date. The
transmittal letter must indicate whether we have elected to pay dissenting
shareholders the fair value of their shares. If so, it must specify the price we
have determined as the fair value of those shares. Within 30 days after the
deadline for submitting Payment Demands (the "Settlement Window"), we must make
payment of that fair value for all the shares of each dissenting shareholder who
accepts our valuation and submits his stock certificates for cancellation.
31
If a dissenting shareholder does not accept our valuation within the
Settlement Window, he may serve us with a written demand to commence an action
in the New Jersey Superior Court for the court's determination of the fair value
of his shares. The demand must be served within 30 days after the expiration of
the Settlement Window. Not later than 30 days after our receipt of the demand,
we must commence the requested action. If we fail to do so, a dissenting
shareholder may commence the action in our name not later than 60 days after the
expiration of the time allotted for us to commence the action.
In any action to determine the fair value of our common stock, all
dissenting shareholders who have not accepted our valuation within the
Settlement Window will be parties to the action. The court may appoint an
appraiser to receive evidence and report to the court on its evaluation of fair
value. The court will determine the appraiser's powers and, based on its
evaluation, will render a judgment against the Parent Company in favor of each
shareholder in the action for the fair value of his shares, as determined by the
court, together with an allowance for interest at a rate set by the court from
the applicable Payment Demand to the day of payment. The judgment will be
payable to a dissenting shareholder upon surrender to the Parent Company of the
certificates representing his shares.
The costs and expenses of any action for determining the fair value of
dissenters' shares, including reasonable compensation for and expenses of any
appraiser, will be determined by the court and apportioned and assessed as the
court determines. Fees and expenses of counsel and of experts for the parties to
the action may be assessed against the Parent Company if the court deems an
assessment to be equitable, but only if the court finds that our offer of
payment was not made in good faith or if we failed to make a payment offer.
The right of any dissenting shareholder to be paid the fair value of
his shares will terminate if (1) he fails to present the certificates
representing his shares for notation, unless a court directs otherwise, (2) the
Payment Demand is withdrawn by the dissenting shareholder with our written
consent, (3) we come to an agreement with the dissenting shareholder on the fair
value of his shares, (4) the New Jersey Superior Court determines that the
shareholder is not entitled to payment for his shares, (5) the Merger is
abandoned or rescinded or (6) a court having jurisdiction permanently enjoins or
sets aside the Merger. In any of those events, a dissenting shareholder's rights
as a shareholder will be reinstated as of the date of his Payment Demand without
prejudice to any corporate action that has taken place in the interim, and the
shareholder will be entitled to receive any intervening preemptive rights and
payment of any intervening dividend or other distribution.
Vote Required
Under New Jersey law, a corporation organized in that State must obtain
shareholder approval for a merger or consolidation transaction that is not in
the ordinary course of business. Because the Merger is not in the ordinary
course of business, our charter requires the affirmative vote of at least
three-quarters of the votes cast by the holders of our Class A common stock and
Class B common stock entitled to vote at the special meeting, voting together as
a class. Our Board recommends that shareholders vote "FOR" the Proposal to
approve the Merger Agreement.
PROPOSAL 4
Nevada Reincorporation and Name Change of Corporate Name
Terms of the Reincorporation and Name Change
Our Board has adopted a resolution authorizing the Reincorporation on
the following terms:
o Prior to the Merger, we will form a wholly owned subsidiary under the
laws of the State of Nevada (the "Nevada Sub").
o The certificate of incorporation of the Nevada Sub will be the same as
our charter, modified for (1) a different name, (2) a provision for
authorized capital stock reflecting the reduction in our authorized
shares and a decrease in their par value to $.01 and (3) a reduction in
the superplurality voting threshold in our charter from three-quarters
to two-thirds of the votes for approval of any merger, consolidation or
asset sale, lease or exchange not in the usual and regular course of
business (the "Superplurality Reduction"). See "Proposal 2 - Share
Combination - Terms of the Share Combination."
32
o Immediately prior to the Merger, Base Ten will merge (the
"Reincorporating Merger") into the Nevada Sub, which will be the
surviving corporation and the Parent Company of Convergence after the
Merger.
o In the Reincorporating Merger, each whole share of our Class A and
Class B common stock outstanding after giving effect to the Share
Combination will be converted into a whole share of the same class of
the Parent Company common stock.
o The plan and agreement of merger for the Reincorporating Merger (the
"Reincorporating Merger Agreement") will provide for a change in the
corporate name of the Parent Company at the time of the Reincorporating
Merger to "Convergence Systems, Inc." or a substantially similar name.
Reasons for the Board's Authorization of the Reincorporation and Name Change
Our Board has unanimously authorized the Reincorporating Merger and
recommends its approval by our shareholders for the following reasons:
o Our Board determined that consolidating the corporate offices of the
Parent Company and Convergence after the Merger will achieve financial
and operating efficiencies. The Convergence Board concurred with this
conclusion and conditioned the obligation of Convergence to consummate
the Merger on completion of the Reincorporation.
o The Convergence Board required the Superplurality Reduction as a
condition to the Merger, and our Board determined that it should have
no practical effect on the voting rights of our current shareholders,
viewed as a class, after the Merger, since they would be unable to veto
any proposal under the current charter provision or after
implementation of the Superplurality Reduction.
o Both Boards also determined that the corporate identity of our
consolidated enterprise after the Merger would be enhanced by adopting
a compatible corporate name for the Parent Company. The name
"Convergence Systems, Inc." was selected for the Parent Company to
serve that purpose.
o The agreement with ABB covering the sale of our MES business includes
our undertaking to seek shareholder approval for a new corporate name
that does not include "Base Ten" or "Base Ten Systems." Changing our
corporate name to "Convergence Systems, Inc." also satisfies that
contractual obligation.
Comparison between New Jersey and Nevada Law
The rights of continuing shareholders after the Reincorporating Merger
will be governed by Nevada rather than New Jersey corporate law. The corporate
laws in these states are substantially alike. Areas where there are substantive
or procedural differences that could affect our shareholders after the Merger
are summarized below.
- ------------------------------------------------------------------------------------------------------------------------
Action Nevada Law New Jersey Law
------ ---------- --------------
- -------------------- --------------------------------------------- -----------------------------------------------------
- -------------------- --------------------------------------------- -----------------------------------------------------
Removal of Directors can be removed by shareholders Directors may be removed for cause or, unless
Directors: representing at least two-thirds of the otherwise provided in the charter, without cause by
voting power of the outstanding stock shareholders representing at least a majority of
entitled to vote on the matter, or any the outstanding stock entitled to vote in the
larger percentage specified in the charter. election of directors.
- -------------------- --------------------------------------------- -----------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
33
- ------------------------------------------------------------------------------------------------------------------------
Action Nevada Law New Jersey Law
------ ---------- --------------
- -------------------- --------------------------------------------- -----------------------------------------------------
- -------------------- --------------------------------------------- -----------------------------------------------------
Merger or Sale: Unless otherwise provided in the charter, a A merger, consolidation or a sale of all or
merger, consolidation or a sale of all or substantially all of a corporation's assets
substantially all of a corporation's assets requires approval by shareholders representing at
requires approval by the shareholders least a majority of the outstanding stock entitled
representing at least a majority of the to vote on the matter (two-thirds for corporations
voting power of the outstanding stock formed before 1969), or any larger percentage
entitled to vote on the matter. specified in the matter.
- -------------------- --------------------------------------------- -----------------------------------------------------
- -------------------- --------------------------------------------- -----------------------------------------------------
Shareholder Action Unless otherwise provided in the charter, Except as otherwise provided in the charter,
by Written Consent: shareholders may act without a meeting by shareholders may act without a meeting by written
written consent of a majority (or any consent of the minimum percentage of the voting
required supermajority) of the voting power power of the outstanding common stock that would be
of the outstanding common stock entitled to required to approve the matter at a meeting, except
vote on the matter, and notice need not be for the annual election of directors, which may be
given to shareholders. by written consent only if unanimous.
- -------------------- --------------------------------------------- -----------------------------------------------------
- -------------------- --------------------------------------------- -----------------------------------------------------
Amendment of A charter or bylaw amendment requires A charter amendment requires approval by vote of a
Charter and approval by vote of the holders of a majority of the votes cast at the meeting by the
By-laws: majority of the outstanding stock entitled holders of shares entitled to vote on the matter.
to vote on the matter and by the holders of Bylaws may also be amended by plurality vote
a majority of the outstanding stock of each
class entitled to vote thereon as a class.
- -------------------- --------------------------------------------- -----------------------------------------------------
- -------------------- --------------------------------------------- -----------------------------------------------------
Exculpation of Directors may not be exculpated from Directors may not be exculpated from liability for
Directors and liability for (1) acts or omissions (1) a breach of their duty of loyalty to the
Officers: involving either intentional misconduct, corporation or its shareholders, (2) acts or
fraud or a knowing violation of the law or omissions not in good faith or involving
(2) the payment of improper distributions. intentional misconduct or a knowing violation of
law or (3) any act or omission from which they
derived an improper personal benefit.
- -------------------- --------------------------------------------- -----------------------------------------------------
- -------------------- --------------------------------------------- -----------------------------------------------------
Stand Stills: Unless waived in the charter, there is a There is a five-year restriction on any business
three-year restriction on transactions combination between a publicly held New Jersey
between public corporations and the holder corporation and an Interested Shareholder unless
of 10% or more of the corporation's the business combination was approved by the
outstanding capital stock (an "Interested corporation's board of directors before the
Shareholder") unless the transaction was shareholder's interest exceeded 10% or more of the
approved before the shareholder's interest corporation's outstanding stock. After the
exceeded 10% or more of the corporation's expiration of the five-year period, covered New
outstanding stock. Even after the Jersey corporations may not engage at any time in
expiration of the three-year period, the a covered business combination with any Interested
transaction will remain prohibited unless Shareholder other than a business combination (1)
(1) the board of directors approved the approved by the holders of two-thirds of the
transaction before the shareholder became voting stock not beneficially owned by the
"interested" or (2) the transaction is Interested Shareholder, (2) with an Interested
approved by a majority of disinterested Shareholder who inadvertently exceeded the 10%
shareholders. threshold and promptly reduced his holdings below
10% or (3) in which the Interested Shareholder pays a
formula price designed to ensure that all other
shareholders receive at least the highest price per
share paid by the Interested Shareholder. A New
Jersey corporation may not opt out of these
provisions.
- ------------------------------------------------------------------------------------------------------------------------
34
Dissenters' Rights
Under New Jersey law, shareholders who object to the Reincorporating Merger
are not entitled to any appraisal or dissenters' rights.
Vote Required
Under our charter, approval of the Reincorporating Merger requires the
affirmative vote of at least three-quarters of the votes cast by the holders of
our Class A common stock and Class B common stock entitled to vote at the
special meeting, voting together as a class. Our Board recommends that the
shareholders vote "FOR" the proposed Reincorporating Merger.
PROPOSAL 5
2002 Stock Option Plan
General
Since 1990, we adopted six compensatory stock option plans (the "Prior
Plans"), providing for the grant of options to purchase an aggregate of 1.3
million shares of our common stock. Outstanding options granted under the Prior
Plans are currently exercisable for a total of 629,791 shares of our Class A
common stock. As reflected in the terms of the Merger Agreement, the Merger
parties determined that the Parent Company should have an option pool for future
grants covering 17% of the Parent Company's common stock to be outstanding after
giving effect to Share Combination and the issuance of the Merger Shares. In
accordance with those terms, the Board adopted a 2002 Stock Option Plan, subject
to approval by our shareholders at the special meeting. Our Board recommends
approval of the 2002 Plan to offer eligible employees of the Parent Company and
its Convergence subsidiary an opportunity to acquire or increase their
proprietary interests in the Parent Company, adding to their incentive to
contribute to the performance and growth of the consolidated enterprise.
Terms of the 2002 Plan
Subject to completion of the Merger, the 2002 Plan authorizes the grant
of options to purchase an aggregate of 4,100 shares of the Parent Company's
Class A common stock, as adjusted for the Reincorporating Merger and the Merger.
Options may be granted under the 2002 Plan either as incentive stock options
("ISOs") or nonqualified stock options ("NSOs") within the meaning of the
Internal Revenue Code. Shares covered by the 2002 Plan may be either previously
unissued or reacquired shares. Shares that cease to be subject to an option
because of its expiration or termination will again be available for the grant
of options until termination of the 2002 Plan.
The 2002 Plan will be administered by the Compensation Committee of the
Parent Company's reconstituted Board. The Compensation Committee will have sole
discretion to select optionees, determine the number of shares subject to each
grant and prescribe the other terms and conditions of each award. All officers
and other employees of the Parent Company and its subsidiaries (including
Convergence) as well as their consultants will be eligible to receive options
under the 2002 Plan, except that any consultant or any person who owns more than
10% of the outstanding common stock may only receive options in the form of
NSOs.
The exercise price of each option granted under the 2002 Plan must be
equal to the fair market value of the Class A common stock, as determined by the
Compensation Committee at the time the option is granted. Payment in full of the
exercise price must be made upon the exercise of each option either in cash,
shares of common stock with a fair market value equal to the exercise price or
by a combination of cash and shares equal to the exercise price. The proceeds
received upon the exercise of options granted under the 2002 Plan will be used
for general corporate purposes.
Options granted under the 2002 Plan may not be transferred except to
the personal representative of a deceased employee. The 2002 Plan provides for a
period of one year during which an option, to the extent vested, may be
exercised after the termination of an optionee's employment or consultancy for
any reason other than cause, as defined in the 2002 Plan. No options may be
granted under the 2002 Plan after January 18, 2012, although the expiration date
of previously granted options may extend beyond that date. The maximum term of
any option is ten years.
35
The number of shares covered by the 2002 Plan and the exercise price of
outstanding options are subject to customary antidilution adjustments in the
event of any recapitalization or similar change affecting the common stock. In
the event the Parent Company sells all or substantially all its consolidated
assets, dissolves, merges or consolidates with another company or is involved in
a tender offer for all or a substantial portion of its common stock, the
Compensation Committee may amend all outstanding options to (1) permit their
exercise prior to the effective date of the transaction or terminate unexercised
options as of that date, (2) require the forfeiture of all options, provided the
Parent Company pays each grantee the excess of the fair market value of the
Class A common stock on that date over the option exercise price, or (3) make
other provisions that it deems equitable.
The Board may amend the 2002 Plan without further shareholder action,
except for a modification that would (1) increase the number of covered shares,
(2) extend the maximum option term or the expiration date of the 2002 Plan, (3)
permit grants below the fair market value of the Class A common stock on the
date of grant or (4) materially increase the benefits or modify the eligibility
requirements under the 2002 Plan. No amendment may adversely affect any then
outstanding option without the consent of the optionee.
No options will be granted under the 2002 Plan prior to the Merger.
Federal Income Tax Matters
An employee receiving an ISO under the 2002 Plan will not be in receipt
of taxable income upon the grant of the ISO or upon its timely exercise except
under alternative minimum tax rules. Generally, exercise of an ISO will be
timely if made during its term and if the optionee remains an employee of the
Parent Company or any subsidiary at all times from the date of grant until three
months before the date of exercise. Upon sale of the stock received up exercise,
the employee will generally recognize long term capital gain or loss equal to
the difference between the sale proceeds and the option exercise price. The
Parent Company, under these circumstances, will not be entitled to any federal
income tax deduction in connection with either the exercise of the ISO or the
sale of the underlying stock by the employee.
For purposes of the alternative minimum tax, an employee exercising an
ISO will have alternative minimum taxable income resulting from the exercise.
The amount of the alternative minimum taxable income and the tax basis in the
shares received upon exercise of an ISO will be determined in the year of
exercise unless the shares received upon exercise are sold to an unrelated party
in the same tax year. In that event, there will generally be no adverse effect
because the alternative minimum taxable income will then be limited to the
taxable gain on the sale as determined for regular tax purposes.
An employee or consultant receiving an NSO or electing to sell option
shares from an ISO exercise prior to the expiration of two years from the grant
date or within one year from the exercise date (a "Disqualified ISO") will not
recognize taxable income upon the grant of the NSO or ISO. Upon exercise of the
NSO or Disqualified ISO, an optionee will recognize ordinary income to the
extent of the difference between the option exercise price and the fair market
value of the stock on the date the option is exercised (the "Compensation
Element"). Upon sale of the stock received upon exercise, the optionee will
generally recognize capital gain or loss equal to the difference between the
sale proceeds and the fair market value of the common stock on the date of
exercise. The Company will be entitled to a federal income tax deduction equal
to the Compensation Element upon the exercise of an NSO or Disqualified ISO. If
an ISO is exercised by a former employee more than three months after his
termination of employment, the ISO will be treated as a Disqualified ISO for
federal income tax purposes.
If an optionee uses previously owned shares of common stock to exercise
an ISO or NSO, the transaction will generally not be considered to be a taxable
disposition of the previously owned shares. However, if the previously owned
shares had been acquired upon exercise of a prior tax qualified stock option and
the holding period requirement for those tendered shares was not satisfied at
the time they were used to exercise an ISO, the use of the tendered shares would
cause the ISO to be treaded as a Disqualified ISO for federal income tax
purposes.
36
Vote Required
Approval of the 2002 Plan requires the affirmative vote by holders of a
majority of the Class A and Class B common stock entitled to vote at the special
meeting, voting together as a class. The Board believes the supplemental and
flexible noncash incentive compensation provided by the 2002 Plan will be useful
in enabling the Parent Company and Convergence to attract and retain qualified
executives and other employees and consultants who can make important
contributions to our success and recommends that shareholders vote to approve
the adoption of the 2002 Plan.
Directors and Officers
Current Members of the Board
Our Board was realigned twice during 2000. In the second quarter, the
Board memberships held by Clark L. Bullock since June 1999 and by Alan S. Poole
since May 1994 were relinquished to Edward J. Klinsport. In the fourth quarter
of 2000, following the sale of our MES business, we announced our plan for the
Business Redirection. To reflect the Business Redirection, the Board appointed
Mr. Klinsport as its Chairman, in place of Stephen Cloughley, and Andrew G.
Sycoff joined the Board in place of Robert Hurwitz. Biographical information
about Andrew G. Sycoff is provided under the caption "Merger with Convergence -
Board Reconstitution." Biographical information about our other current
directors is set forth below.
John C. Rhineberger, age 57, was appointed to the Board in May 1999 for
a term expiring at the 2002 annual meeting of shareholders. Since 1997, he has
been employed as President of The Rhineberger Organization, Inc., a provider of
sales, marketing and product development consulting services to the home center
and related industries. From 1996 to August 1997, Mr. Rhineberger was a Vice
President of Shaw Industries, Inc., a carpet manufacturer, with responsibility
for retail operations. He previously held positions as a merchandising executive
for Home Depot, President and Chief Executive Officer of Post Tool Retail Stores
and Sun Flooring Distribution, each a subsidiary of West Union Company,
President and General Manager of Sherwin Williams Floor World, a floor covering
retail business, and various executive positions, including President and Chief
Operating Officer, at Color Tile, a retail store chain.
Edward J. Klinsport, age 54, has served on the Board since June 2000
and was appointed Chairman of the Board, Chief Executive Officer and President
of Base Ten during October 2000 in connection with the Board's decision to
implement the Business Redirection and a related management realignment. Mr.
Klinsport also serves as Chairman of the Board, Chief Executive Officer and
President of Paragon Industries Corp., a electronics contract manufacturer that
he co-founded in 1999. Mr. Klinsport was the founder, Chief Executive Officer
and President of Strategic Technology Systems, Inc., which purchased the Base
Ten's government technology division ("GTD") in 1997. Prior to that transaction,
he served as a director of Base Ten, commencing in 1985, and as a member of
senior management, commencing in 1978, most recently as Executive Vice President
and Chief Financial Officer as well as General Manager of GTD operations.
Executive Officers
The following tables lists our current executive officers:
Officer of
Base Ten
Name Age Position Since
---- --- --------------------------------------- ----------
Edward J. Klinsport 54 Chairman of the Board, President, Chief
Executive Officer and a Director 2000
Kenneth W. Riley 39 Chief Financial Officer, Treasurer and
Secretary 2000
37
Biographical information about Mr. Klinsport is provided above under
the caption "Current Members of the Board," and biographical information about
Mr. Riley is provided below.
Kenneth W. Riley joined Base Ten as its Controller in May 1999. In
October 2000, he was named Chief Financial Officer, Treasurer and Secretary.
Prior to joining Base Ten, Mr. Riley was the Chief Financial Officer of Ocean
Computer Group from 1998 to 1999 and the Vice President - Finance and
Administration of Decision Technology, Inc. from 1989 to 1998. Mr. Riley also
served on the audit staff of Ernst & Young and is licensed as a Certified Public
Accountant.
Actions by the Board in 2001
During 2001, the Board took formal action, either at meetings or by
consent, on two occasions. No director attended or participated in fewer than
75% of the meetings or actions by consent while serving on the Board during
2001.
Committees and Committee Meetings
The Board has an Audit Committee and a Compensation Committee. The
Audit Committee is responsible for monitoring and reviewing the financial
affairs and financial statements of Base Ten and performing related internal
financial review procedures. The Compensation Committee is responsible for
evaluating salary and bonus arrangements for all officers and key employees of
Base Ten and for administering its employee benefit plans.
The Audit Committee and Compensation Committee were chaired by Alan S.
Poole prior to his resignation from the Board in June 2000, when his role on
both Committees was assumed by Mr. Rhineberger. Since October 2000, Mr. Sycoff
has served on both Committees. Each of these Committees held one meeting during
2001.
Compensation of Directors
No fees were paid to directors of Base Ten during 2001.
Beneficial Ownership Reporting
Based on a review of forms filed with the Securities and Exchange
Commission to report changes in their beneficial ownership of our common stock,
none of our officers or directors failed to file any required reports on a
timely basis during 2001.
Compensation of Executive Officers
The following table sets forth the total remuneration paid by Base Ten
during the last three years to its Chief Executive Officer ("CEO") and all other
executive officers who earned over $100,000 in any of those years (collectively
with the CEO, the "Named Officers"). The information includes base salaries,
bonus awards and long-term incentive plan payouts, as well as the number of
stock options and stock appreciation rights ("SARs") granted and any other
compensation, whether paid or deferred.
38
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Name and 2000 -------------------------- ---------------------- All Other
Principal Position Year Salary Bonus Other(1) Option/SAR Awards (#) Compensation
- ------------------ ------- --------- ----- ----- --------------------- ------------
Edward J. Klinsport 2001......$ 100,000 -- -- -- --
CEO after 10/29/00 2000...... 13,461 -- -- 10,000 --
Kenneth W. Riley 2001...... 147,500 -- -- -- --
CFO 2000...... 86,146 -- -- 14,500 --
1999...... 48,125 -- -- 1,000 --
Stephen A. Cloughley(2) 2000...... 155,769 -- -- -- $ 97,962
CEO until 10/29/00 1999...... 74,923 -- -- 55,000 71,524
William F. Hackett(3) 2000...... 151,442 -- -- -- 90,000
SVP and CFO 1999...... 174,808 -- -- -- --
- --------------------
(1) Perquisites and other benefits did not exceed 10% of any named
officer's total annual salary.
(2) Other compensation received by Mr. Cloughley consisted of severance
payments, forgiveness of an employee loan and compensation deferred from 1999.
His employment terminated on October 29, 2000. See "Termination Agreements"
below.
(3) Other compensation received by Mr. Hackett consisted of severance
payments. His employment terminated on October 27, 2000. See "Termination
Agreements" below.
Stock Options
During 2001, no stock options or SARs were granted or exercised by the
Named Officers.
Termination Agreements
We entered into a termination agreement with William F. Hackett in
connection with his resignation as Chief Financial Officer, Senior Vice
President, Secretary and Treasurer on October 27, 2000. The agreement provided
for a contemporaneous severance payment of $90,000 plus a contingent payment of
$85,000 based on satisfactory resolution of various matters, including
obligations under our Trenton, New Jersey office lease, a breach of contract
claim by a former customer and the windup of subsidiary operations in Mechelen,
Belgium. In February 2001, Mr. Hackett agreed to accept $20,000 and an
assignment of a country club membership maintained by Base Ten in lieu of the
stipulated contingent payment.
We entered into a termination agreement with Stephen A. Cloughley in
connection with his resignation as President and Chief Executive Officer on
October 29, 2000. The agreement provided for a contemporaneous severance payment
of $72,000, consulting fees totaling $22,500 for transitional services through
year end and contingent compensation estimated at $7,500 upon sale of our
Clinical Software business.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is chaired by Mr. Rhineberger, who has
served on the Committee since 1999. Mr. Klinsport was appointed to the Committee
upon his election to the Board in June 2000 and served in that capacity until
being named President and Chief Executive Officer in October 2000. At that
point, Mr. Sycoff was added as the second member of the Committee. Neither Mr.
Rhineberger nor Mr. Sycoff have ever served as an officer of Base Ten or had any
related party transactions with Base Ten other than consulting arrangements with
a firm owned by Mr. Rhineberger and the proposed issuance of Merger Warrants to
Mr. Sycoff for introducing the Merger parties and assisting in structuring the
transaction. See "Certain Transactions."
39
Compensation Committee Report on Executive Compensation
Compensation Policy. Historically, our executive compensation program
was designed to remunerate executives fairly and provide additional incentive
for them to remain with Base Ten and maximize their performance on its behalf.
The compensation program consisted of base salary, annual incentive bonus and
periodic grants of stock options. The Board's objective, reflected in
recommendations by the Compensation Committee, was to integrate these
compensation components with our annual and long term performance as well as the
achievements and contributions of the individual executives. In this way, the
compensation program was structures to balance the relationship between
compensation and performance in the best interests of our shareholders. Since
the Board's adoption of the Business Redirection strategy in October 2000 and
related management realignment, our two incumbent executive officers agreed to
limit their compensation to a base salary reflecting our limited financial
resources.
Base Salary. Base salaries for 2001 were established at the beginning
of the year based on the Compensation Committee's assessment of each Named
Officer's (1) overall performance, (2) position and responsibilities, (3)
contribution, experience and relative importance to the enterprise, (4) prior
year's compensation in comparison with salaries for similarly situated
executives at comparable companies and (5) Base Ten's financial condition, prior
year's financial performance and success or failure in meeting strategic
objectives for the prior year. In making its recommendations, the Compensation
Committee did not assign any specific weight to any particular factor or attempt
to correlate base salaries in relation to any group of comparable companies.
Instead, it considered the entire mix of factors in the aggregate and made
subjective determinations to arrive at recommendations it considered
appropriate.
Conclusion. The Committee believes that the executive compensation
policies implemented through its recommendations serve the interests of Base
Ten's shareholders and the long range goals of Base Ten.
This report has been approved by the
following members of the Compensation
Committee: JOHN C. RHINEBERGER ANDREW G. SYCOFF
Performance Graph
The following graph compares the yearly percentage change in Base Ten's
cumulative total shareholder return with the cumulative return (assuming
reinvestment of dividends) of (1) the Nasdaq Market Index and (2) the MG
Industry Group 821, Application Software, Information Technology and Services,
Media General Financial Services, P.O. Box 85333, Richmond, Virginia 23293
(accessible through Industriscope, Dialog and Dow Jones News Retrieval). MG
Industry Group 821 includes both our Class A and Class B common stock.
- --------------------------------------------------------------------------------------------------------------------------
10/31/96 10/31/97 12/31/97 12/31/98 12/31/99 12/31/00 12/31/00
------------ ------------- ----------- ------------ ------------ ------------ -----------
Base Ten - Class A 100.00 136.47 97.06 30.59 4.47 0.19 0.16
- -------------------------------- ------------ ------------- ----------- ------------ ------------ ------------ -----------
MG Industry Group 821 100.00 149.73 142.86 251.08 480.40 262.55 250.18
- -------------------------------- ------------ ------------- ----------- ------------ ------------ ------------ -----------
NASDAQ Market Index 100.00 131.06 129.44 182.57 322.00 202.39 161.33
- --------------------------------------------------------------------------------------------------------------------------
40
Principal Shareholders
The following table shows the number of shares of common stock
beneficially owned as of August 31, 2002 by:
o each person known to beneficially own more than 5% of the common stock
o each current director
o each incumbent Named Officer
o the current directors and executive officers as a group
Class A Class B
Common Stock Common Stock
Beneficially Beneficially Percentage
5% Shareholders Owned Owned of Class
- --------------- ------------- ------------- --------------
Jesse Upchurch(1)................................ 2,432,303 -- 40.6%
Almedica International, Inc.(2).................. 633,700 -- 10.7
Executive Officers and Directors
Edward J. Klinsport(3)........................... 10,000 -- *
Andrew Sycoff(3)................................. 88,666 -- 1.5
John C. Rhineberger(3)........................... 10,200 -- *
Kenneth W. Riley(3).............................. 14,603 -- *
Current directors and executive officers(3)
as a group (4 persons)........................ 123,469 -- 1.8%
- ------------------------------------------------------------------------------------------------------------------------------------
* Less than 1% of class.
(1) The address of Mr. Upchurch is 500 Main Street, Fort Worth, TX 76102.
Represents (a) 1,528,573 shares held directly by Mr. Upchurch, (b) 703,730
shares held directly by the Constance J. Upchurch Family Trust (the "Trust"), of
which Mr. Upchurch is the executor and beneficiary, and (c) 200,000 shares
issuable upon the exercise of warrants. The Trust also owns 500,000 shares of
Convergence Series A-3 preferred stock.
(2) The address of Almedica International, Inc. is 75 Commerce Drive,
Allendale, NJ 07401.
(3) Includes options or warrants exercisable within 60 days by (a) Messrs.
Rhineberger and Klinsport for 10,000 shares each, (b) Mr. Sycoff for 79,000
shares, (c) Mr. Riley for 14,500 shares and (d) all current directors and
executive officers as a group for 113,500 shares.
41
Certain Transactions
A firm owned by John C. Rhineberger, a member of our Board and its
Compensation and Audit Committees since May 1999, served as a consultant to Base
Ten for strategic advice in connection with the disposition of its software
operations. Under the consulting contract, which continued for one year through
October 2001, Mr. Rhineberger received total payments of $100,000.
Andrew Sycoff, a member of our Board and its Compensation and Audit
Committees since October 2000, will receive Merger Warrants exercisable for
1,136 Warrant Shares (adjusted for the Share Combination) for introducing the
Merger parties and assisting in structuring the transaction. See "Proposal 3 -
Merger with Convergence -- Terms of the Merger Agreement-Board Reconstitution."
Mr. Sycoff also assisted Convergence obtain the participation of the
Constance J. Upchurch Family Trust in a convertible debt offering by Convergence
in October 2001. He received a fee from Convergence in the form of 50,000 shares
of its common stock for his services in connection with the transaction.
It is the policy of our Board to structure any transactions with
related parties only on terms that are no less favorable to Base Ten than could
be obtained on an arm's length basis from unrelated parties.
Business of Convergence
The following information has been provided by management of
Convergence. Based on our due diligence review in connection with the Merger, we
believe the factual statements included in this information are accurate. Any
forward looking statements should be read in conjunction with our cautionary
disclosures under the caption "Proposal 3 - Merger with Convergence -- Risk
Factors."
Introduction
Convergence is an e-Health company focused on providing interactive
resources to assist people make healthy lifestyle decisions informed by exposure
to alternative and preventative as well as traditional healthcare options. As an
initial offering, Convergence has developed its web-based PHA to be deployed
with large businesses and health plans for use by their employees and
participants. Convergence has designed the PHA as an engaging and entertaining
collection of interactive assessments, programs and multimedia content. Each PHA
site offers its users a personalized view of their health and lifestyle, coupled
with multidisciplinary options for understanding and addressing their health
concerns. By encouraging adoption of wellness lifestyles that can increase
productivity and reduce healthcare costs, Convergence believes its PHA offers
tangible benefits both to sponsors and end users.
Background
Convergence was organized as a Nevada corporation in March 2000 by
Byron Gehring, Dr. Kenneth Waltzer and Glen Miller (the "Founders") to succeed
by merger to the business of the Convergence Predecessor. See "Proposal 3 -
Merger with Convergence -- Terms of the Merger-Board Reconstitution" and
"Executive Officers" below. Building on the technology acquired from the
Convergence Predecessor, Convergence developed a patent pending process called
the "Medicine Engine" to provide users with interactive personalized feedback
assimilated from its interdisciplinary data base compiled under the direction of
Dr. Waltzer.
Convergence was initially capitalized with $650,000 in equity
contributions from the Founders and their associates. Between July 2000 and
January 2002, ongoing software development, licenses and acquisitions for the
components of the PHA were funded with additional equity capital, convertible
debt and Founder loans aggregating $3.5 million. Major acquisitions were
completed in May 2000 for the assets of MEDigy, Inc., including various software
systems and content for the PHA, and in September 2000 for the assets of
HealthWorldOnline, Inc., an e-commerce business focused on wellness products and
content. Convergence is seeking to dispose of the HealthWorldOnline business to
concentrate its limited resources on PHA development, marketing and deployment.
42
Business Strategy
From inception, Convergence has developed its business plan and initial
product offering on the premise that the healthcare market will increasingly be
shaped by a fundamental shift away from the traditional supplier dominated model
to a consumer oriented model addressing the desires of 75 million aging baby
boomers for products and services that can improve their overall health and
quality of life. Convergence believes this trend will force the integration of
conventional medicine with complementary and alternative medicine. As healthcare
consumers become more assertive in their demand for products and services that
address their health concerns and meet their wellness objectives, employers will
presumably take action to provide responsive solutions to their workforces.
While health benefit providers historically have been slow to provide or cover
new product offerings that address these goals issues, the need to meet consumer
demand should ultimately affect their decision making as well.
Convergence's purpose is to encourage lifestyle changes and adoption of
preventive healthcare options that can reduce reliance on disease management and
intervention. To serve that purpose, Convergence has focused on marshaling
Internet and interactive multimedia technology to provide corporate employees
with personalized feedback on maintaining a wellness lifestyle grounded in good
nutrition, adequate exercise and the potential benefits of alternative and
preventive health options. The strategy adopted by Convergence for deploying
this resource is to focus on the corporate employer, since a path to wellness
solutions not only benefits the individuals who choose that path but also makes
good business sense for corporate sponsors. Businesses providing this type of
resource to their workforce for access in the workplace can expect to improve
their corporate image, boost employee morale and productivity and ultimately
reduce the cost of employee healthcare benefits.
Personal Health Application
Convergence has developed its Personal Health Application by combining
in-house clinical expertise and advanced web and interactive software
development with strategic acquisitions of key technologies, content and
multimedia assets. The result is engaging and entertaining as well as
informative. It consists of an integrated collection of interactive healthy
living assessments, programs and multimedia content reflecting the convergence
of conventional and alternative health options. The PHA is designed to encourage
people to adopt healthier lives by providing them with a personalized view of
their health and lifestyle, coupled with multidisciplinary options for
understanding and addressing their health concerns.
The PHA includes a broad range of software tools to help people improve
their quality of life. They include interactive health assessments, personal
health profiles, disease or symptom assessments, life area assessments,
healthcare decision support tools and lifestyle and disease management programs.
Many of these are actionable programs that help coach and motivate users. The
PHA also provides natural health store, provider directory, diet, nutrition and
fitness tools, ask the experts via e-mail, health journal, health calendar,
health history and electronic health record, live newsfeed and customizable
newsletter, as well as one of the largest link libraries in the e-Health market.
Convergence believes its PHA currently gives it an early mover
advantage in the fragmented healthy living and integrative health markets,
primarily because conventional medicine has been the main focus within e-Health
markets to date. Convergence is not aware of any comparable products now on the
market that provides consumers, employers and benefit providers with wellness
tools that are both integrated and interactive, with access to over 40,000 pages
of integrative health content.
Business Plan
The eHealth market reflects the public's insatiable appetite for health
information. Initial entries have demonstrated, however, that the path to
profitability for a consumer driven business model dependent upon advertising or
e-commerce alone can be highly elusive. To avoid those pitfalls, Convergence has
focused on developing core software assets that can be deployed within multiple
revenue streams. The PHA was selected as an initial offering because it can be
utilized in three variations of a licensing model, depending on whether the
usage or subscription fees are sought from a corporate sponsor, health plan or
the consumer.
43
Target Markets
Initially, Convergence has concentrated its limited resources on the
employee health benefit market. With million of covered lives, it represents the
largest potential revenue source. In the face of escalating costs, its also
represents a market that should be receptive to web based, self service
applications, particularly resources like the PHA that can potentially reduce
modifiable health risks, which are generally believed to account for up to 25%
of healthcare expenditures. To reach this market, Convergence plans to
concentrate its marketing efforts on the third party benefit providers that
generally manage health plans. They include traditional health insurers, HMOs,
MBHOs and employee assistance program providers. With increasing pressure to
meet employers' needs for more innovative products, many of these organizations
are already beginning to include integrated health services in their offerings,
including web based products that can stimulate greater use of their services
without increasing costs. Convergence also plans to market its PHA directly to
corporations with large work forces, since they generally represent the actual
purchaser of eHealth products, whether sold directly or through a health benefit
intermediary.
Land-based health centers such as hospitals, medical clinics, wellness
centers, spas and health clubs also represent a potential market for web based
products because they can provide additional services and value, as well as
incremental revenue, at relatively low cost. There are over 5,000 hospitals in
the US, about 2,000 wellness centers and spas, and over 15,000 health clubs.
These land-based businesses service over 100 million people each year.
Convergence expects these facilities to provide a second potential market for
its PHA.
Revenue Model
Convergence plans to provide access to PHA web sites to corporate
sponsors and health benefit intermediaries under non-exclusive, multi-year
licenses. License fees in this sector are expected to be based on a capitated
service fee model, either "per member per month" or "per employee per month."
Land-based health centers will be charged an annual license fee based on the
number of patients, clients or customers who will have access to the PHA.
Negotiated annual rates may also be implemented.
Ancillary revenue streams may be available at some point for membership
and affinity programs. In addition, e-commerce revenues may be derived from both
direct sales of lifestyle and disease management programs and other premium
services, and indirectly through commissions from sales of partners' products
and services resulting from use of PHA assessments, decision support tools and
programs.
Competition
Convergence believes it currently faces a broad mix of indirect
competitors that offer parts of its total service offering, with direct
competitors expected to emerge with comprehensive comparable services within the
next few years. Current competitors can be categorized as channel competitors
and content/commerce competitors.
Channel competitors providing corporate wellness and related programs
include online corporate wellness programs that are extensions of established
brands, such as Mayo Clinic's Healthquest, Johnson & Johnson's Live For Life,
Staywell.com and Gordian Health Solutions. They also include online corporate
wellness initiatives developed by start-up ventures such as DoHealth,
MyDailyHealth, Nutrio.com, Wellmed and Wellcall. Employee assistance programs
with an online or corporate presence such as Lifescape, Lifeworks, Horizon
Health and American Psych Systems are also cannel competitors by attempting to
move into the wellness space, since they compete for the same benefit funds.
This category also includes health insurance companies that seek to provide a
comprehensive range of information to support their insurance plans. They
include Aetna/US Healthcare, Kaiser Permanente and Blue Cross/Blue Shield. Many
of these channel competitors offer established wellness programs that will
compete with Convergence for access to employees, and virtually all have
substantially greater resources for implementing their programs. Convergence
believes, however, that most of these competitors focus primarily on disease
management and intervention. With its focus on prevention, Convergence hopes to
find a means to complement and even partner with their existing offerings.
44
Content/commerce competitors provide "healthy living" information or
health and wellness products and merchandise. These companies will compete with
Convergence for product sales, content and community development. They include
e-commerce sites such as Drugstore.com, Planet Rx and More.com, e-Health
pure-plays including Web/MD, Drkoop.com, Health Central and CBS HealthWatch,
online communities like iVillage, Women.com and Oxygen.com, and portals to
pharmaceutical companies, many of which are free. Although some of these
companies could be either strategic alliance partners or even future acquisition
candidates, Convergence intends to compete pending any of those developments
based on the quality of its product offering, marketing efficiency, price and
brand strategies. Other content/commerce competitors include FoodFit.com,
eDiets, CyberDiet, Asimba and FitnessOnline, all of which tend to focus on one
aspect of healthy living such as weight loss and fitness. Convergence plans to
distinguish itself from this category of content/commerce sites by delivering an
accessible, actionable, seamless experience that uses personalized programs to
promote healthy eating and healthy lifestyle changes.
Executive Officers
Key members of Convergence's management team are Byron Gehring, Dr.
Kenneth Waltzer, Jay Handline and Glenn Miller. Biographical information about
Mr. Gehring and Dr. Waltzer is provided under the caption "Merger with
Convergence - Terms of the Merger -- Board Reconstitution." Biographical
information about Messrs. Handline and Miller is set forth below.
Jay Handline, age 46, is the Chief Marketing Officer of Convergence. He
has more than 20 years of experience at senior management levels on both the
payer and provider sides of the health services industry. Since 1995, he has
been involved with various start-up ventures in developing various multiple
media platforms, including cable television, Internet and telephony, prior to
which he served as Chief Operational Architect and Executive Vice President of
Interactive Technology Solutions at RnetHealth.com. Mr. Handline has also
managed and co-founded two multi-media technology companies.
Glenn Miller, age 45, is the Chief Technical Officer of Convergence.
Prior to joining Convergence, he served as Chief Technology Officer at Strategic
Resource Solutions Corp., a technology-based energy services company and a
wholly owned subsidiary of the Fortune 500 utility, Carolina Power and Light. He
developed its innovative core technology, a platform that enables organizations
to control, navigate and monitor all facility operations through the Internet,
as well as many other web based tools and services. He previously held a senior
executive position at Applied Computer Technologies, where he led the effort on
development of web based real-time workflow management software. In 1995 he was
recognized by Microsoft Corp. as one of the top 20 developers in the world.
Financial Information
The following tables present summary historical and pro forma financial
information for Convergence as of the dates and for the periods indicated.
Except as otherwise noted, the financial information presented below is derived
from the audited Financial Statements of Convergence included at the end of this
proxy statement. This information should be read in conjunction with those
Financial Statements and related Notes thereto. The pro forma information
presented below for the year ended December 31, 2000 gives effect to the March
2000 merger of the Convergence Predecessor into Convergence as of January 1,
2000.
45
- --------------------------------------------------------------------------------
CONVERGENCEHEALTH.COM
- --------------------------------------------------------------------------------
Six Months Year Ended
Ended June 30, December 31,
--------------------------- ---------------------------
2002 2001 2001 2000
----------- ----------- ----------- -----------
Unaudited
STATEMENT OF OPERATIONS DATA(1)
Revenues - net.......................................$ 115,400 $ 30,600 $ 84,700 $ 500
----------- ----------- ----------- -----------
Operating expenses
Cost of providing services........................ -- -- -- 400
Salaries.......................................... 54,000 303,400 307,100 585,700
Professional fees................................. 243,600 179,000 736,200 451,600
Other general and administrative expenses......... 227,100 330,600 261,000 2,131,700
----------- ----------- ----------- -----------
Total operating expenses........................ 524,700 813,000 1,304,000 3,169,400
----------- ----------- ----------- -----------
Loss from operations................................. (409,300) (782,400) (1,220,700) (3,168,900)
----------- ----------- ----------- -----------
Other income (expense)
Interest income................................... 400 6,200 10,200
Interest expense.................................. (90,600) -- (125,600) (4,400)
Loss on disposal of assets........................ -- -- (51,600) --
Gain on sale of web site.......................... -- -- 30,000 --
----------- ----------- ----------- -----------
Total other income (expense) - net.............. (90,200) 6,200 (140,400) 5,900
----------- ----------- ----------- -----------
Net loss.............................................$ (499,500) $ (776,200) $(1,361,000) $(3,162,000)
===========- =========== =========== ===========
Net loss per common share and equivalents:
Basic and diluted.................................$ (0.19) $ (0.31) $ (0.53) $ (1.29)
=========== ========== ============ ===========
Weighted number of shares outstanding:
Basic and diluted................................. 2,613,400 2,514,300 2,571,800 2,456,700
=========== =========== ============ ===========
As of As of
June 30, 2002 December 31, 2001
--------------- -------------------
Unaudited
BALANCE SHEET DATA:
Working capital (deficit).......................................$ (523,000) $ (1,376,200)
Total assets.................................................... 81,700 237,000
Total liabilities............................................... 604,900 1,717,700
Shareholders' deficiency........................................ (523,200) (1,620,800)
- -------------------------------------------------------------------------------------------------------------------
(1) Amounts are rounded to the nearest $100.
46
Incorporation of Documents by Reference
The following documents previously filed by Base Ten with the SEC under
the Exchange Act are incorporated into this proxy statement by reference:
o Annual Report on Form 10-KSB for the year ended December 31, 2001;
o Current Report on Form 8-K dated January 30, 2002, including a copy of
the Merger Agreement dated as of January 18, 2002;
o Current Report on Form 8-K dated March 14, 2002, including a copy of
the Merger Agreement, as amended and restated on February 11, 2002 and
a copy of Amendment No. 1 to the Amended and Restated Merger Agreement;
o Quarterly Report on Form 10-QSB for the quarter ended March 31, 2002;
o Current Report on Form 8-K dated June 20, 2002, including a copy of
Amendment No. 2 to the Amended and Restated Merger Agreement; and
o Quarterly Report on Form 10-QSB for the quarter ended June 30, 2002,
including a copy of Amendment No. 3 to the Amended and Restated Merger
Agreement.
Additional Information
Proxy Materials and Periodic Reports
Our reports and other information filed with the SEC in accordance with
the requirements of the Exchange Act pertaining to small business issuers can be
inspected and copied at the public reference facilities maintained by the SEC at
Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the SEC's regional offices. We file our periodic reports with the SEC
electronically, and the SEC maintains a web site providing access to those
materials at http://www.sec.gov.
This proxy statement and related proxy card are being mailed to
shareholders on or about September __, 2002. Upon request, additional proxy
materials will be furnished without cost to brokers and other nominees for
forwarding to beneficial owners of shares held in their names. Upon request, we
will also furnish beneficial owners with copies of our periodic reports
incorporated by reference in this proxy statement. See "Incorporation of
Documents by Reference."
Cost of Proxy Solicitation and the Share Combination
The cost of preparing and mailing this proxy statement to our
shareholders is estimated at approximately $100,000. In addition to the use of
the mails for distribution of this proxy statement, proxies for the Proposals
may be solicited by our directors and officers, without additional compensation,
by personal interview, telephone or otherwise.
We estimate that up to 500,000 shares of our common stock are held in Small
Accounts that will be cashed out as fractional shares as a result of the Share
Combination. Based on the current common stock market price of $.05 per share at
the time of mailing this proxy statement, we expect our total cost for
repurchasing fractional shares in the Share Combination at approximately
$30,000, including $5,000 in estimated administrative costs. Any increase or
decrease in the number or size of Small Accounts and any increase or decrease in
the market price of our common stock during the 20 trading days preceding the
date of the special meeting will add to or reduce that cost proportionately.
47
CONVERGENCEHEALTH.COM
(A DEVELOPMENT STAGE ENTERPRISE)
- --------------------------------------------------------------------------------
PROXY STATEMENT
- --------------------------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
Page
----
Unaudited Pro Forma Consolidated Financial Statements of Base Ten
Introduction to Unaudited Pro Forma Consolidated Financial Statements..................................... F-2
Unaudited Pro Forma Consolidated Balance Sheet - June 30, 2002............................................ F-3
Notes to Unaudited Pro Forma Consolidated Balance Sheet................................................... F-4
Unaudited Pro Forma Consolidated Statement of Operations - Six Months ended June 30, 2002................. F-5
Unaudited Pro Forma Consolidated Statement of Operations - Year Ended December 31, 2001................... F-6
Notes to Unaudited Pro Forma Consolidated Statements of Operations........................................ F-7
Unaudited Consolidated Financial Statements of ConvergenceHealth.com
Unaudited Balance Sheets - June 30, 2002 and 2001......................................................... F-8
Unaudited Statements of Operations - Six Months ended June 30, 2002 and 2001.............................. F-9
Unaudited Statements of Cash Flows - Six Months ended June 30, 2002 and 2001.............................. F-10
Notes to Unaudited Financial Statements................................................................... F-11
Consolidated Financial Statements of ConvergenceHealth.com
Independent Auditors' Report.............................................................................. F-13
Balance Sheet - December 31, 2001......................................................................... F-14
Statements of Operations - Years ended December 31, 2001 and 2000 and period from
June 9, 1999 (inception) to December 31, 2001........................................................... F-15
Statement of Shareholders' Deficiency - Period from June 9, 1999 (inception) to December 31, 2001......... F-16
Statements of Cash Flows - Years ended December 31, 2001 and 2000 and period from
June 9, 1999 (inception) to December 31, 2001........................................................... F-17
Notes to Financial Statements............................................................................. F-18
F-1
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The Unaudited Pro Forma Consolidated Balance Sheet of Base Ten Systems,
Inc. ("Base Ten") as of June 30, 2002 and the Unaudited Pro Forma Consolidated
Statements of Operations of Base Ten for the six months ended June 30, 2002 and
the year ended December 31, 2001 have been prepared to illustrate the estimated
effect of the Company's proposed sale of its clinical trials software business
("Clinical Software") and its proposed acquisition of ConvergenceHealth.com
("Convergence"). The Pro Forma Consolidated Statements of Operations give pro
forma effect to the sale of the Clinical Software business and the acquisition
of Convergence as if both transactions had occurred on January 1, 2001. The Pro
Forma Consolidated Balance Sheet gives pro forma effect to both transactions as
if they had occurred on June30, 2002.
The Pro Forma Consolidated Financial Statements do not purport to be
indicative of the results of operations or the financial position of Base Ten
that would have actually been obtained had the sale of the Clinical Software
Business and the acquisition of Convergence been completed as of the assumed
dates and for the periods presented or that may be obtained in the future. The
pro forma adjustments are described in the following Notes and are based upon
available information and certain assumptions that Base Ten believes are
reasonable. The Pro Forma Consolidated Financial Statements should be read in
conjunction with the separate historical financial statements of Base Ten and
related notes incorporated by reference in this proxy statement and with the
separate historical financial statements of Convergence and related notes
included elsewhere in this proxy statement.
A preliminary allocation of the purchase price for the Convergence
acquisition has been made to major categories of assets and liabilities in the
accompanying Pro Forma Consolidated Financial Statements based on available
information. The actual allocation of purchase price and the resulting effect on
income (loss) from operations may differ significantly from the pro forma
amounts included herein. These pro forma adjustments represent Base Ten's
preliminary determination of purchase accounting adjustments and are based upon
available information and certain assumptions that Base Ten believes to be
reasonable. Consequently, the amounts reflected in the Pro Forma Consolidated
Financial Statements are subject to change, and the final amounts may differ
substantially.
F-2
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2002
(In thousands)
Pro Forma Pro Forma Pro Forma
Base Ten Convergence Adjustments Adjustments Consolidated
-------- ----------- ----------- ----------- ------------
(a) (b)
Assets:
Cash and cash equivalents........................ $ 418 $ 75 $ 75 $ $ 570
Accounts receivable.............................. 5 5
Other current assets............................. 158 -- 158
Current assets of discontinued operations........ 75 -- (75) --
--------- --------- -------- -------- ---------
Total current assets.......................... 651 82 733
--------- --------- -------- -------- ---------
Property and equipment, net...................... 3 -- 3
Investment in Convergence........................ 290 -- (290) --
Other assets..................................... 10 -- 10
--------- --------- -------- -------- ---------
Total assets.................................. $ 954 $ 82 $ $ (290) $ 746
========= ========= ======== ======== =========
Liabilities:
Accounts payable................................. $ 55 $ 242 $ $ $ 297
Accrued expenses................................. 147 142 289
Notes payable to officer......................... -- 220 220
--------- --------- -------- -------- ---------
Total current liabilities..................... 202 604 806
--------- --------- -------- -------- ---------
Total long term liabilities................... -- -- --
--------- --------- -------- -------- ---------
Shareholders' equity (deficit):
Preferred stock.................................. -- 7 (7) --
Common stock..................................... 26,857 3 (26,642) 218
Additional paid-in capital....................... 68,481 4,491 (4,491) 68,481
Accumulated deficit.............................. (94,370) (5,023) 30,850 (68,493)
---------- --------- -------- -------- ---------
968 (522) (290) 206
Accumulated other comprehensive income........... 65 65
Treasury stock, at cost.......................... (281) (281)
--------- --------- -------- -------- ---------
Total shareholders' equity (deficit).......... 752 (472) (290) (60)
--------- --------- -------- -------- ---------
Total liabilities and shareholders' equity
(deficit) ...................................... $ 954 $ 132 $ $ (290) $ 746
======== ========= ======== ======== =========
See Notes to Unaudited Pro Forma Consolidated Balance Sheet
F-3
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2002
(a) The pro forma adjustments reflect the terms of Base Ten's agreement
with Almedica International, Inc. and Almedica Advanced Technology LLC
("Almedica LLC") for the contribution of the Clinical Software assets to
Almedica LLC for $75,000 and a 20% ownership interest in Almedica LLC. The
Clinical Software assets are reflected in Base Ten's financial statements at
their estimated net realizable value of $75,000, with no value attributed to the
interest in Almedica LLC to be received by the Company in the transaction.
(b) Base Ten's agreement with Convergence provides for the merger of
Convergence into a wholly owned subsidiary of Base Ten (the "Merger"). Base Ten
will account for the Merger under the purchase method. Because the Merger will
be treated as a purchase of Base Ten by Convergence for accounting purposes,
Base Ten's consolidated balance sheet after the Merger will reflect the assets
acquired in the Merger based on their book value at the time of the Merger,
without any step up to reflect their valuation based on the shares of Base Ten's
common stock to be issued to the Convergence shareholders in the Merger.
F-4
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(In thousands, except per share data)
Pro Forma Pro Forma
Base Ten Convergence Adjustments Consolidated
-------- ----------- ----------- ------------
(c)(d) (a)(e)
Revenues, net.................................... $ -- $ 115 $ $ 115
--------- --------- --------- ---------
Selling, general and administrative expenses..... 353 524 877
--------- --------- --------- ---------
Operating loss................................ (353) (409) (762)
Other income (expense), net...................... 11 (91) (80)
--------- --------- --------- ---------
Net loss......................................... $ (342) $ (500) $ $ (842)
========= =========- ========= =========
Net loss per common share........................ $ (.06) $ (.19) $ (.04)
========= ======== ========
Weighted average common shares outstanding....... 5,351 2,613 (2,613)
========= =========
16,449 21,800
========= =========
See Notes to Unaudited Pro Forma Consolidated Financial Statements
F-5
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(In thousands, except per share data)
Pro Forma Pro Forma
Base Ten Convergence Adjustments Consolidated
-------- ----------- ----------- ------------
(a)(c) (b)
Revenues, net.................................... $ -- $ 84 $ $ 84
--------- --------- --------- ---------
Selling, general and administrative expenses..... 841 1,305 2,146
--------- --------- --------- ---------
Operating loss................................ (841) (1,221) (2,062)
Other income (expense), net...................... 114 (140) (26)
--------- --------- --------- ---------
Net loss......................................... $ (727) $ (1,361) $ $ (2,088)
========= ========= ========= =========
Net loss per common share........................ $ (.14) $ (.53) $ (.10)
========= ======== =========
Weighted average common shares outstanding....... 5,351 2,572 (2,572)
========= =========
16,449 21,800
=========
See Notes to Unaudited Pro Forma Consolidated Financial Statements
F-6
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
AND THE YEAR ENDED DECEMBER 31, 2001
(a) The Pro Forma Statements of Operations assume that Base Ten's proposed
sale of its Clinical Software business and proposed acquisition of Convergence
occurred on January 1, 2001. For purposes of the Pro Forma Statements of
Operations, Base Ten's historical statements of operations for the six months
ended June 30, 2002 and for the year ended December 31, 2001 were combined with
the historical statements of operations of Convergence for the same periods.
(b) Base Ten expects to account for the Merger with Convergence under the
purchase method, which requires that the Merger be treated for accounting
purposes as the purchase of Base Ten by Convergence. As a result, Base Ten's
consolidated balance sheet after the Merger will reflect the assets acquired in
the Merger based on their book value at the time of the Merger, without any step
up to reflect their valuation in determining the consideration to be received by
Convergence shareholders in the Merger.
(c) The pro forma additional shares used in calculating pro forma net loss
per share for the year ended December 31, 2001 and the six months ended June 30,
2002 reflects the cancellation of outstanding Convergence common and preferred
shares in the Merger in exchange for approximately 16,449,000 shares of Base
Ten's Class A common stock, representing 75% of the total pro forma outstanding
Class A and Class B common shares, issuable to Convergence shareholders in the
Merger, without regard to the Share Combination, assuming the Merger took place
January 1, 2001. No pro forma interest expense savings has been reflected for
these periods.
F-7
CONVERGENCEHEALTH.COM
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED CONDENSED BALANCE SHEET
AS OF JUNE 30, 2002
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 76,700
-------------
Total Current Assets 5,000
-------------
81,700
-------------
TOTAL ASSETS $ 81,700
- ------------ =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable $ 242,500
Accrued interest and other liabilities 142,400
Notes payable to officer 220,000
-------------
Total Current Liabilities 604,900
-------------
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES 604,900
-------------
STOCKHOLDERS' DEFICIENCY
Class A-1 Preferred stock $.001 par value, 325,000 shares authorized,
issued and outstanding 300
Class A-2 Preferred stock $.001 par value, 1,375,000 shares authorized, 1,177,000
issued and outstanding 1,300
Class A-3 Preferred stock $.001 par value, 5,000,000 shares authorized, 800,000 issued
and outstanding 5,000
Common stock $ .001 par value, 50,000,000 shares authorized,
2,655,000 issued and outstanding 2,700
Additional paid-in capital 4,491,000
Accumulated deficit (5,023,500)
-------------
Total Stockholders' Deficiency (523,200)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 81,700
- ---------------------------------------------- =============
See Notes to Unaudited Condensed Financial Statements
F-8
CONVERGENCEHEALTH.COM
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Period from
Six Months Ended Inception
June 30, (June 9, 1999)
------------------------------- through
2002 2001 June 30, 2002
------------- ------------- -------------
Unaudited Unaudited
Revenues, net.................................................$ 115,400 $ 30,600 $ 199,700
------------- ------------- --------------
Operating expenses:
Salaries................................................... 54,000 303,400 947,300
Professional fees.......................................... 243,600 179,000 1,431,400
Other general and administrative expenses.................. 277,100 330,600 2,619,800
------------- ------------- --------------
Total operating expenses................................. 524,700 813,000 4,998,500
------------- ------------- --------------
Loss from operations.......................................... (409,300) (782,400) (4,798,800)
Other income (expense):
Interest income............................................ 400 6,200 17,500
Interest expense........................................... (90,600) -- (220,600)
Loss on disposal of assets................................. -- -- (51,600)
Gain on sale of website.................................... -- -- 30,000
------------- ------------- --------------
Total other income (expense), net........................ (90,200) 6,200 (224,700)
------------- ------------- --------------
Net loss......................................................$ (499,500) $ (776,200) $ (5,023,500)
============= ============= ==============
Net loss per common share and equivalents:
Basic and diluted..........................................$ (0.19) $ (0.31) $ (2.24)
============= ============= ==============
Weighted number of shares outstanding:
Basic and diluted.......................................... 2,613,400 2,514,300 2,244,100
============= ============= ==============
See Notes to Unaudited Condensed Financial Statements
F-9
CONVERGENCEHEALTH.COM
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
Period from
Six Months Ended Inception
June 30, (June 9, 1999)
------------------------------- through
2002 2001 June 30, 2002
------------- ------------- -------------
Unaudited Unaudited
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................$ (499,500) $ (776,200) $ (5,023,500)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.......................... -- -- 41,600
Loss on disposal of assets............................. -- -- 51,600
Stock issued for services.............................. -- -- 30,000
Changes in operating assets and liabilities:
Increase in other assets............................... -- -- (5,400)
Increase (decrease) in accounts payable
and accrued expenses................................. 69,900 (101,600) 524,200
Decrease (increase) in other accrued liabilities......... (100) 46,800 177,000
------------- ------------- --------------
Net cash used in operating activities.................. (429,700) 924,600 (4,204,500)
------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment......................... -- (1,100) (74,200)
------------- ------------- --------------
Net cash used in investing activities.................... -- (1,100) (74,200)
------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes and loans payable...................... -- 335,000 1,231,300
Proceeds from issuance of preferred stock.................. 415,000 120,000 3,124,100
------------- ------------- --------------
Net cash provided by financing activities................ 415,000 455,000 4,355,400
------------- ------------- --------------
NET INCREASE (DECREASE) IN CASH............................... (14,700) (470,700) 76,700
CASH AND CASH EQUIVALENTS - BEGINNING
OF PERIOD.................................................. 91,400 518,300 --
------------- ------------- --------------
CASH AND CASH EQUIVALENTS - END
OF PERIOD .................................................$ 76,700 $ 47,600 $ 76,700
============= ============= ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES
During the six months ended June 30, 2002, the Company issued 4,196,000 shares
of preferred stock for $415,000 in cash and $1 million in converted principal
amount of its convertible promissory notes.
See Notes to Unaudited Condensed Financial Statements
F-10
CONVERGENCEHEALTH.COM
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Organization and Description of Business
ConvergenceHealth.com (the "Company") was formed on June 9, 1999 in the state of
Nevada as Wild Wild Web Ventures and is in the development stage. The Company
changed its name to ConvergenceHealth.com in February 2000. Simultaneous with
the name change, the Company acquired all the outstanding stock and assets of
Convergence Health, Inc., an inactive development stage California corporation
("CHI"), for 996,000 shares of the Company's common stock. CHI was dissolved
subsequent to the acquisition.
The Company is developing the production of web-enabled application software.
The software is designed to provide end-users with personalized information on
holistic health and alternative medicine that may be used to improve health
status. This software will be licensed to health benefit providers and sponsors
who will make it available to workers in the corporate workplace for a monthly
fee per employee. Although the Company has realized marginal revenues in the
form of subscription fees from users of its website, at June 30, 2002, the
Company has not yet commenced material operations, and primarily all activity
has been focused on product and business plan development. The Company is
dependent on its ability to raising capital to fund ongoing operations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The consolidated interim financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the year ended December 31, 2001. The results of
operations for the six months ended June 30, 2002 are not necessarily indicative
of the operating results for the full year. In management's opinion, all
adjustments necessary for a fair presentation of the Company's financial
position and operating results are reflected in the accompanying statements.
(B) Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reported
period. Actual results could differ from those estimates.
(C) Cash and Cash Equivalents
For purposes of the cash flow statements, the Company considers all highly
liquid investments with original maturities of three months or less at time of
purchase to be cash equivalents.
(D) Property and Equipment
Property and equipment were stated at cost, less accumulated depreciation.
Expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation was provided using the straight-line method over the estimated
useful lives of the assets from three to five years. See Note 2.
(E) Income Taxes
The Company accounts for income taxes under the Statement of Financial
Accounting Standards No. 109. "Accounting for Income Taxes" ("Statement No.
109"). Under Statement No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
F-11
(F) Stock Options
In accordance with Statement of Financial Accounting Standards No. 123 ("SFAS
123") the Company has elected to account for Stock Options issued to employees
under Accounting Principles Board Opinion No. 25 ("APB Opinion No. 25") and
related interpretations.
(G) Per Share Data
Basic net income per common share is computed based on the weighted average
common shares outstanding during the year as defined by Statement of Financial
Accounting Standards, No. 128, "Earnings Per Share" ("SFAS 128"). Basic and
diluted net income per common share is computed based on the weighted average
common shares and common stock equivalents outstanding during the year as
defined by SFAS 128. Common stock equivalents have not been included in the
weighted average computation since the results would be anti dilutive.
(H) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" requires disclosures of information about the
fair value of certain financial instruments for which it is practicable to
estimate that value. For purposes of this disclosure, the fair value of a
financial instrument is the amount at which the instrument could be exchanged in
a current transaction between willing parties other than in a forced sale or
liquidation.
The carrying amounts of the Company's financial instruments, including accounts
payable, accrued liabilities, and notes and loans payable approximates fair
value.
(I) Website Development Expenses
The Company follows the Emerging Issues Task Force Issue 00-2, "Accounting for
Web Site Development Costs" in accounting for its website development expenses.
Accordingly, costs that involve design of the web page and do not change the
content are capitalized and amortized over their estimated useful life. Costs
incurred in operating a web site that have no future benefits are expensed in
the current period. Costs incurred in operating the web site which have a future
benefit are capitalized in accordance with the AICPA's Statement of Position
98-1 and amortized over the respective future periods which are expected to
benefit from the changes.
NOTE 2 - PROPERTY AND EQUIPMENT
During 2001, the Company disposed of its fixed assets resulting in a loss of
$51,640. Total depreciation expense for the six months ended June 30, 2002 and
2001 was $0 and $10,000, respectively.
NOTE 3 - NOTES PAYABLE AND RELATED PARTY TRANSACTIONS
Notes Payable
The following schedule reflects short-term notes payable to related parties at
June 30, 2002:
Note payable to an officer of the Company, unsecured, due in full on demand, bearing
interest at 10% (See Note 5) $ 40,000
Note payable to an officer of the Company, unsecured, due in full on demand, bearing
interest at 5% (See Note 5) 180,000
--------------
$ 120,000
==============
The accrued interest on the notes payable at December 31, 2001 is included with
accrued interest and other liabilities on the balance sheet. Interest expense
for the six month period ended June 30, 2002 was $90,600. No interest expense
was accrued on the notes for the six months ended June 30, 2001.
F-12
Related Party Transactions
The Company received advances of $196,000 during 2002 from an officer of the
Company. Proceeds of $180,000 were used to repay an outstanding demand
promissory note payable with interest at 5% per annum to a third party. The
terms of the third party demand loan carried over to this portion of the
officer's loan. The balance of officer's loan was used for working capital and
bears no interest. Total non-interest bearing funds due to the officer at June
30, 2002 was $75,000 and is included on the balance sheet as accounts payable.
A second note due to the officer for $125,000 was converted in 2002 into 500,000
shares of the Company's Series A preferred stock.
NOTE 4 - INCOME TAXES
At June 30, 2002, the Company had net operating loss carryforwards of
approximately $4,934,000 for income tax purposes, available to offset future
taxable income and expiring on various dates through 2022. The net operating
loss created a deferred tax asset of approximately $1,678,000. This tax asset
has been fully reserved through a valuation allowance due to the uncertainty of
future operations generating income to realize the deferred tax asset.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
(A) Operating Lease Agreements
On April 16, 2001, the Company entered into a new sublease agreement covering
3,312 square feet of office space. The sublease called for monthly payments of
$1,600 and was for a term of fourteen months expiring June 30, 2002. The Company
cancelled the lease in June 2001.
(B) Consulting Agreements
The Company entered into a consulting agreement with Jay Handline to provide
brand development services and a related marketing plan. The agreement does not
specify any termination date but can be cancelled by either party on 30 days'
notice and provides for monthly payments of $10,000. The Company has recorded
expenses under the agreement of $60,000 included in professional fees for both
of the six-month periods ended June 30, 2002 and June 30, 2001.
NOTE 6 - STOCKHOLDERS' DEFICIENCY
Authorized Common and Preferred Stock
The Company is authorized to issue 50,000,000 common shares, $.001 par value. At
June 30, 2002 there were 2,655,000 shares outstanding.
The Company is authorized to issue up to 25,000,000 shares of preferred stock.
The Board of Directors has been given the discretion of designating the number,
series and preferences assigned to the preferred stock. As of June 30, 2002, the
Board of Directors has designated three types of preferred stock. All three of
these series of preferred stock have preferences only in liquidation and do not
have any other rights or privileges superior to the common stock.
Series A-1 Preferred
The Company is authorized to issue 325,000 shares of Series A-1 preferred stock,
$0.001 par value. At June 30, 2002, there were 325,000 shares of Series A-1
preferred stock outstanding.
Series A-2 Preferred
The Company is authorized to issue 1,375,000 shares of Series A-2 preferred
stock, $0.001 par value. At June 30, 2002, there were 1,316,000 shares of Series
A-2 preferred stock outstanding.
F-13
Series A-3 Preferred
The Company is authorized to issue 5,000,000 shares of Series A-3 preferred
stock, 0.001 par value. At June 30, 2002,there were 4,996,000 shares of Series
A-3 preferred stock outstanding.
NOTE 7 - GOING CONCERN
As reflected in the accompanying financial statements, the Company has
accumulated losses of $5,023,500 since inception, a working capital deficiency
of $523,200, a stockholders' deficiency of $523,200 and a negative cash flow
from operations of $429,700 during the six months ended June 30, 2002. The
ability of the Company to continue as a going concern is dependent on the
Company's ability to raise additional funds and implement its business plan. The
accompanying financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
The Company is a party to an Agreement and Plan of Merger dated January 18, 2002
(as subsequently amended, the "Merger Agreement") with Base Ten Systems, Inc.
("Base Ten") and its wholly owned subsidiary (the "Merger Sub"). The Merger
Agreement provides for the merger of the Company into the Merger Sub (the
"Merger"). To provide the Company with needed working capital prior to the
Merger, Base Ten has purchased an aggregate of 1,160,000 shares of the Company's
Series A-3 preferred stock for $290,000 since January 2002. In addition to the
Merger and ongoing efforts to market the Company's products to healthcare
organizations and benefit plan sponsors, management plans to seek equity or debt
financing from various sources as well as other business combinations or
alliances to enhance its product offerings and marketing capabilities.
NOTE 8 - SUBSEQUENT EVENT
Subsequent to June 30, 2002, Base Ten and the Company amended the Merger
Agreement to provide for unsecured working capital loans to the Company pending
completion of the Merger. The Company received the proceeds from an initial
$125,000 loan on August 1, 2002. Base Ten has committed to make additional loans
of $50,000 each month from October 2002 until the earlier of January 2003 or
completion of the Merger. The amendment also restricts the rights of the Company
to terminate the Merger Agreement under certain circumstances without first
repaying Base Ten's loans and repurchasing all or part of its preferred stock
investment in the Company.
Consummation of the Merger is subject to various conditions, including approval
by both parties' shareholders and completion of a 1-for-1,000 reverse split of
Base Ten's common stock and a related fractional share repurchase (the "Share
Combination"). The Share Combination is intended to save administrative costs
after the Merger by reducing Base Ten's shareholder base below 300, enabling it
to terminate its reporting obligations as a publicly held small business
company.
If the Merger is approved by the parties' shareholders and the other closing
conditions are satisfied, the Merger Sub will merge into the Company, which will
survive the Merger as a wholly owned subsidiary of Base Ten. At the time of the
Merger, the outstanding capital stock of the Company will be converted into the
right to receive Class A common stock of Base Ten representing 75% of its common
shares to be outstanding after its repurchase of fractional shares in the Share
Combination.
F-14
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of:
ConvergenceHealth.com
We have audited the accompanying balance sheet of ConvergenceHealth.com (a
development stage enterprise) as of December 31, 2001 and the related statements
of operations, changes in stockholders' equity, and cash flows for the years
ended December 31, 2001 and 2000 and for the period from June 9, 1999
(inception) to December 31, 2001. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatements. 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 financial statements referred to above, present fairly, in
all material respects, the financial position of ConvergenceHealth.com (a
development stage enterprise) as of December 31, 2001 and the results of its
operations and its cash flows for the years ended December 31, 2001 and 2000 and
for the period from June 9, 1999 (inception) to December 31, 2001 in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 11 to the
financial statements, the Company has accumulated losses of $4,524,032 since
inception, a working capital deficiency of $1,376,245, a stockholders'
deficiency of $1,620,845 and a negative cash flow from operations of $1,222,163.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. Management's plan in regards to these matters is also described
in Note 11. The accompanying consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
WEINBERG & COMPANY, P.A.
Los Angeles, CA
April 16, 2002
F-15
CONVERGENCEHEALTH.COM
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
AS OF DECEMBER 31, 2001
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 91,429
--------------
Total Current Assets 91,429
--------------
OTHER ASSETS
Deposits 5,400
--------------
Total Other Assets 5,400
--------------
TOTAL ASSETS $ 96,829
- ------------ ==============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable $ 265,293
Accrued interest and other liabilities 173,389
Notes payable 970,000
Due to officer 58,992
--------------
Total Current Liabilities 1,467,674
--------------
LONG-TERM LIABILITIES
Notes payable 250,000
--------------
Total Long-Term Liabilities 250,000
--------------
TOTAL LIABILITIES 1,717,674
--------------
STOCKHOLDERS' DEFICIENCY
Class A-1 Preferred stock $.001 par value, 325,000 shares authorized,
issued and outstanding 325
Class A-2 Preferred stock $.001 par value, 1,375,000 shares authorized, 1,177,000 issued and outstanding 1,177
Class A-3 Preferred stock $.001 par value, 5,000,000 shares authorized, 800,000 issued and outstanding 800
Common stock $ .001 par value, 50,000,000 shares authorized,
2,655,000 issued and outstanding 2,655
Additional paid-in capital 2,898,230
Deficit accumulated during development stage (4,524,032)
--------------
Total Stockholders' Deficiency (1,620,845)
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 96,829
- ---------------------------------------------- ================
The accompanying notes are an integral part of these financial statements.
F-16
CONVERGENCEHEALTH.COM
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
For The Period
For The Year For The Year June 9,1999
Ended Ended (Inception) To
December 31, December 31, December 31,
2001 2000 2001
------------------- ------------------- -------------------
REVENUES - NET $ 83,717 $ 548 $ 84,265
----------------- ----------------- -----------------
OPERATING EXPENSES
Salaries 307,102 586,151 893,253
Professional fees 736,222 451,633 1,187,855
General and administrative expenses 261,046 2,131,651 2,392,697
----------------- ----------------- -----------------
Total Operating Expenses 1,304,370 3,169,435 4,473,805
----------------- ----------------- -----------------
LOSS FROM OPERATIONS (1,220,653) (3,168,887) (4,389,540)
----------------- ----------------- -----------------
OTHER INCOME (EXPENSE)
Interest income 6,894 10,248 17,142
Interest expense (125,635) (4,359) (129,994)
Loss on disposal of assets (51,640) - (51,640)
Gain on sale of web site 30,000 - 30,000
----------------- ----------------- -----------------
Total Other Income-Net (140,381) 5,889 (134,492)
----------------- ----------------- -----------------
NET LOSS $ (1,361,034) $ (3,162,998) $ (4,524,032)
- --------- ================= ================= =================
Net loss per common share and equivalents -
basic and diluted $ (0.53) $ (1.29) $ (2.08)
================= ================= =================
Weighted average number of shares outstanding
during the period - basic and diluted 2,571,758 2,456,723 2,172,728
================= ================= =================
The accompanying notes are an integral part of these financial statements.
F-17
CONVERGENCEHEALTH.COM
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD FROM JUNE 9, 1999 (INCEPTION) TO DECEMBER 31, 2001
Preferred Stock Preferred Stock Preferred Stock
Class A-1 Class A-2 Class A-3
Shares Amount Shares Amount Shares Amount
----------- --------- ------------ ---------- ---------- ---------
Issuance of common stock - $ - - $ - - $ -
for acquisition of
Convergence Health, Inc.
Issuance of common stock
for cash - - - - - -
Issuance of common stock
for conversion of note
payable to stockholder - - - - - -
Issuance of preferred
stock for cash 325,000 325 705,000 705 - -
Net loss, 2000 - - - - - -
--------- ------- ---------- -------- -------- -------
Balance, December 31, 325,000 325 705,000 705 - -
2000
Issuance of common stock
for cash - - - - - -
Stock issued for services - - 12,000 12 - -
Issuance of preferred
stock for settlement of
amounts due to officer - - 239,200 239 - -
Issuances of preferred
stock for cash - - 220,800 221 800,000 800
Net loss, 2001 - - - - - -
--------- ------- ---------- -------- -------- -------
BALANCE, 325,000 $ 325 1,177,000 $ 1,177 800,000 $ 800
DECEMBER 31, 2001 ========= ======= ========== ======== ======== =======
[RESTUBBED TABLE]
Accumulated
Additional During
Common Stock Paid-In Development
Shares Amount Capital Stage Total
----------- --------- ----------- ------------- ------------
Issuance of common stock
for acquisition of
Convergence Health, Inc. 996,000 $ 996 $ 18,044 $ - $ 19,040
Issuance of common stock
for cash
Issuance of common stock 1,547,000 1,547 - - 1,547
for conversion of note
payable to stockholder
Issuance of preferred 12,000 12 14,988 - 15,000
stock for cash
Net loss, 2000 - - 2,386,470 - 2,387,500
- - - (3,162,998) (3,162,998)
Balance, December 31, --------- ------- --------- ----------- ----------
2000
2,555,000 2,555 2,419,502 (3,162,998) (739,911)
Issuance of common stock
for cash
Stock issued for services 100,000 100 - - 100
Issuance of preferred - - 29,988 - 30,000
stock for settlement of
amounts due to officer
Issuances of preferred - - 129,761 - 130,000
stock for cash
Net loss, 2001 - - 318,979 - 320,000
- - - (1,361,034) (1,361,034)
BALANCE, --------- ------- --------- ----------- ----------
DECEMBER 31, 2001
2,655,000 $ 2,655 $ 2,898,230 $ (4,524,032) $ (1,620,845)
========= ======= ========= =========== ==========
The accompanying notes are an integral part of these financial statements.
F-18
CONVERGENCEHEALTH.COM
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
For The Period
From
For The Year For The Year June 9,1999
Ended Ended (Inception) To
December 31, December 31, December 31,
2001 2000 2001
------------------- ------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,361,034) (3,162,998) $ (4,524,032)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 20,281 21,355 41,636
Loss on disposal of assets 51,641 - 51,641
Stock issued for services 30,000 - 30,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Other assets 1,500 (6,900) (5,400)
Increase decrease in: -
Accounts payable and accrued expenses (75,494) 340,787 265,293
Advances from officer - 188,992 188,992
Other accrued liabilities 110,943 66,171 177,114
-------------- -------------- ---------------
Net Cash Used In Operating Activities (1,222,163) (2,552,593) (3,774,756)
-------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,115) (73,122) (74,237)
-------------- -------------- ---------------
Net Cash Used In Investing Activities (1,115) (73,122) (74,237)
-------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes and loans payable 476,275 755,000 1,231,275
Proceeds from issuance of preferred stock and common stock 320,100 2,389,047 2,709,147
-------------- -------------- ---------------
Net Cash Provided By Financing Activities 796,375 3,144,047 3,940,422
-------------- -------------- ---------------
NET INCREASE (DECREASE) IN CASH (426,903) 518,332 91,429
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 518,332 - -
-------------- -------------- ---------------
CASH AND CASH EQUIVALENTS - END OF PERIOD 91,429 518,332 $ 91,429
============== ============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 14,000 $ - $ 14,000
============== ============== =================
The accompanying notes are an integral part of these financial statements.
F-19
CONVERGENCEHEALTH.COM
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
During 2000, the Company issued 996,000 shares of common stock for the
acquisition of Convergence Health, Inc. in the amount of $19,040.
During 2000, the Company issued 12,000 shares of common stock for the conversion
of a note payable to a stockholder in the amount of $15,000.
During 2001, the Company issued 64,000 shares of A-2 preferred stock for the
settlement of $130,000 in amounts due from officer.
During 2001, the Company sold a domain name in settlement of a $30,000 note
payable.
The accompanying notes are an integral part of these financial statements.
F-20
CONVERGENCEHEALTH.COM
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Organization and Description of Business
ConvergenceHealth.com (the "Company") was formed on June 9, 1999 in the state of
Nevada as Wild Wild Web Ventures and is in the development stage. The Company
changed its name to ConvergenceHealth.com on February 22, 2000. Simultaneous
with the name change, the Company acquired all the outstanding stock and assets
of Convergence Health, Inc. ("CHI") an inactive development stage California
corporation, for 996,000 shares of common stock. Subsequent to the acquisition
CHI was dissolved.
The Company is developing the production of web-enabled application software.
The software is designed to provide end-users with personalized and relevant
information on holistic health and alternative medicine that may be used to
improve health status. This software will be licensed to health benefit
providers who will make it available to workers in the corporate workplace for a
monthly fee per employee. At December 31, 2001, the Company has not yet
commenced material operations, and primarily all activity to date relates to
formation, fundraising, product and business plan development. The Company
currently receives fees from users of its website which is currently being
developed.
The Company's future operations is dependent upon its ability to raise
additional working capital through the issuance of equity or debt securities, or
a combination thereof in order to implement its business plan.
(B) Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reported
period. Actual results could differ from those estimates.
(C) Cash and Cash Equivalents
For purposes of the cash flow statements, the Company considers all highly
liquid investments with original maturities of three months or less at time of
purchase to be cash equivalents.
(D) Property and Equipment
Property and equipment were stated at cost, less accumulated depreciation.
Expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation was provided using the straight-line method over the estimated
useful lives of the assets from three to five years (See Note 2).
(E) Income Taxes
The Company accounts for income taxes under the Statement of Financial
Accounting Standards No. 109. "Accounting for Income Taxes" ("Statement No.
109"). Under Statement No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
F-21
(F) Advertising Revenue
Advertising revenue is derived from the ancillary sale of advertising on the
Company's website. Advertising revenue is recognized in the period the
advertising is displayed as long as the Company has no significant obligations
outstanding with respect to the advertising account at the end of the period and
its collection of any outstanding associated receivable is probable.
(G) Stock Options
In accordance with Statement of Financial Accounting Standards No. 123 ("SFAS
123") the Company has elected to account for Stock Options issued to employees
under Accounting Principles Board Opinion No. 25 ("APB Opinion No. 25") and
related interpretations.
(H) Per Share Data
Basic net income per common share is computed based on the weighted average
common shares outstanding during the year as defined by Statement of Financial
Accounting Standards, No. 128, "Earnings Per Share" ("SFAS 128"). Basic and
diluted net income per common share is computed based on the weighted average
common shares and common stock equivalents outstanding during the year as
defined by SFAS 128. Common stock equivalents have not been included in the
weighted average computation since the results would be anti dilutive.
(I) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" requires disclosures of information about the
fair value of certain financial instruments for which it is practicable to
estimate that value. For purposes of this disclosure, the fair value of a
financial instrument is the amount at which the instrument could be exchanged in
a current transaction between willing parties other than in a forced sale or
liquidation.
The carrying amounts of the Company's financial instruments, including accounts
payable, accrued liabilities, and notes and loans payable approximates fair
value.
(J) Website Development Expenses
The Company follows the Emerging Issues Task Force Issue 00-2, "Accounting for
Web Site Development Costs" in accounting for its website development expenses.
Accordingly, costs that involve design of the web page and do not change the
content are capitalized and amortized over their estimated useful life. Costs
incurred in operating a web site that have no future benefits are expensed in
the current period. Costs incurred in operating the web site which have a future
benefit are capitalized in accordance with the AICPA's Statement of Position
98-1 and amortized over the respective future periods which are expected to
benefit from the changes.
(K) Recent Accounting Pronouncements
The Financial Accounting Standards Board has recently issued several new
Statements of Financial Accounting Standards. Statement No. 141, "Business
Combinations" supersedes APB Opinion 16 and various related pronouncements.
Pursuant to the new guidance in Statement No. 141, all business combinations
must be accounted for under the purchase method of accounting; the
pooling-of-interests method is no longer permitted. SFAS 141 also establishes
new rules concerning the recognition of goodwill and other intangible assets
arising in a purchase business combination and requires disclosure of more
information concerning a business combination in the period in which it is
completed. This statement is generally effective for business combinations
initiated on or after July 1, 2001.
F-22
Statement No. 142, "Goodwill and Other Intangible Assets" supercedes APB Opinion
17 and related interpretations. Statement No. 142 establishes new rules on
accounting for the acquisition of intangible assets not acquired in a business
combination and the manner in which goodwill and all other intangibles should be
accounted for subsequent to their initial recognition in a business combination
accounted for under SFAS No. 141. Under SFAS No. 142, intangible assets should
be recorded at fair value. Intangible assets with finite useful lives should be
amortized over such period and those with indefinite lives should not be
amortized. All intangible assets being amortized as well as those that are not,
are both subject to review for potential impairment under SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of". SFAS No. 142 also requires that goodwill arising in a business
combination should not be amortized but is subject to impairment testing at the
reporting unit level to which the goodwill was assigned to at the date of the
business combination.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and
must be applied as of the beginning of such year to all goodwill and other
intangible assets that have already been recorded in the balance sheet as of the
first day in which SFAS No. 142 is initially applied, regardless of when such
assets were acquired. Goodwill acquired in a business combination whose
acquisition date is on or after July 1, 2001, should not be amortized, but
should be reviewed for impairment pursuant to SFAS No. 121, even though SFAS No.
142 has not yet been adopted. However, previously acquired goodwill should
continue to be amortized until SFAS No. 142 is first adopted.
Statement No. 143 "Accounting for Asset Retirement Obligations" establishes
standards for the initial measurement and subsequent accounting for obligations
associated with the sale, abandonment, or other type of disposal of long-lived
tangible assets arising from the acquisition, construction, or development
and/or normal operation of such assets. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002, with earlier application encouraged.
The adoption of these pronouncements will not have a material effect on the
Company's financial position or results of operations.
(L) Concentrations of Credit Risk from Deposits in Excess of Insured Limits
The Company's cash balances on deposit with banks are guaranteed by the Federal
Deposit Insurance Corporation up to $100,000. The Company is exposed to risk for
the amounts of funds held in one bank in excess of the insurance limit. At
December 31, 2001, the Company had approximately $23,200 in excess of the
insurance limit. In assessing the risk, the Company's policy is to bank with
high quality financial institutions.
NOTE 2 - PROPERTY AND EQUIPMENT
During 2001, the Company disposed of its fixed assets resulting in a loss of
$51,640. Total depreciation expense for the years ended December 31, 2001 and
2000 was $20,281 and $21,355, respectively.
NOTE 3 - INTANGIBLES
During 2000, the Company purchased computer software, in process web-site
development software, trademarks, service marks and lists from various
individuals operating under the "Medigy" and "Healthworld Online" trade names in
California and North Carolina. The purchase price for these intangibles
aggregated $957,610, which was expensed in 2000 because the related software had
not yet reached the feasibility stage.
On July 20, 2001, the Company transferred its rights in the domain name
"healthy.com" to Dave Robertson in full settlement of its note payable due June
30, 2001. The Company had acquired its rights in the domain name with the assets
purchased from various individuals operating under the "Healthworld Online"
trade name. The book value of the note payable exceeded the $0 fair value of the
domain name by $30,000 as of July 20, 2001. Accordingly, the Company recorded a
gain of $30,000 for the transaction in its Statement of Operations for the year
ended December 31, 2001.
F-23
NOTE 4 - NOTES PAYABLE
(A) Notes Payable - Short-Term
The following schedule reflects short-term notes payable at December 31, 2001:
Note payable, unsecured, due in full on demand, bearing interest at 10% (See Note 5) $ 40,000
Note payable, unsecured, due in full on demand, bearing interest at 5% 180,000
Note payable, secured by assets of the Company, due in full on June 30, 2002, bearing
interest at 12%. The note is convertible to A-3 preferred stock at the option of the
Company (See Note 11). 750,000
--------------
$ 970,000
==============
(B) Notes Payable - Long-Term
The following schedule reflects long-term notes payable at December 31, 2001:
Note payable, unsecured, principal and interest due on September 30, 2003, bearing $ 125,000
interest at 12%. The note is convertible to A-3 preferred stock at the option of the
Company (See Notes 5 and 11).
Note payable, unsecured, principal and interest due on September 30, 2003, bearing
interest at 12% The note is convertible to A-3 preferred stock at the option of the
Company (See Note 11). 125,000
----------------
Total long-term notes payable $ 250,000
================
Required payments of principal on notes payable at December 31, 2001 are
summarized as follows:
2002 $ 970,000
2003 250,000
----------------
$ 1,220,000
================
The accrued interest on the notes payable at December 31, 2001 is included with
accrued interest and other liabilities on the balance sheet. Interest expense
for the periods ended December 31, 2001 and 2000 was $115,649 and $4,359,
respectively.
NOTE 5 - RELATED PARTY TRANSACTIONS
The Company received advances totaling $188,992 during 2000 from an officer of
the Company for working capital. The advances are non-interest bearing and,
based on an oral agreement with the Company, are repayable on demand. The
balance due on the advances at December 31, 2001 was $58,992.
The Company is indebted to an officer of the Company for a total of $165,000 in
notes payable. A note for $40,000 is due on demand and bears interest at 10%
until paid. A second note for $125,000 is due on September 30, 2003 and bears
interest at 12%. See Note 4.
NOTE 6 - INCOME TAXES
At December 31, 2001, the Company had net operating loss carryforwards of
approximately $4,484,000 for income tax purposes, available to offset future
taxable income expiring on various dates through 2021. The net operating loss
created a deferred tax asset of approximately $1,525,000. This tax asset has
been fully reserved through a valuation allowance due to the uncertainty of
future operations generating income to realize the deferred tax asset.
F-24
NOTE 7 - COMMITMENTS AND CONTINGENCIES
(A) Operating Lease Agreements
On April 16, 2001 the Company entered into a new sublease agreement covering
3,312 square feet of office space. The sublease called for monthly payments of
$1,600 and was for a term of fourteen months expiring June 30, 2002. The Company
cancelled such lease in June 2001.
(B) Consulting Agreements
The Company entered into a consulting agreement with Jay Handline to provide
brand development services and a related marketing plan. The agreement does not
specify any termination date but can be cancelled by either party on 30 days
notice and calls for monthly payments of $10,000. The Company has recorded
expenses of $120,000 and $60,000 included in professional fees for the years
ended December 31, 2001 and 2000, respectively, related to this agreement.
The Company entered into finders fee agreements with various individuals to
assist it in finding qualified investors for equity or debt financing. The
agreements call for payments between 2.5% to 10% of the financing depending on
the type of investor. Amounts due are payable one year after the closing of any
financing between an introduced investor and the Company. The Company has not
paid or accrued any fees related to these agreements for the years ended
December 31, 2001 and 2000 because no financings were completed with introduced
investors.
NOTE 8 - STOCKHOLDERS' DEFICIENCY
(A) Authorized Common and Preferred Stock
The Company is authorized to issue 50,000,000 common shares at $.001 par value.
At December 31, 2001, there were 2,655,000 shares outstanding.
The Company is authorized to issue up to 25,000,000 shares of preferred stock.
The Board of Directors has been given the discretion of designating the number,
series and preferences assigned to the preferred stock. As of December 31, 2001,
the Board of Directors has designated three separate series of preferred stock.
All three of these series have preferences over the Company's common stock only
in liquidation and do not have any other rights or privileges superior to the
common stock.
Series A-1 Preferred
The Company is authorized to issue 325,000 shares of Series A-1 preferred stock,
$0.001 par value. At December 31, 2001, there were 325,000 shares of Series A-1
preferred stock outstanding.
Series A-2 Preferred
The Company is authorized to issue 1,375,000 shares of Series A-2 preferred
stock, $0.001 par value. At December 31, 2001, there were 1,177,000 shares of
Series A-2 preferred stock outstanding.
Series A-3 Preferred
The Company is authorized to issue 5,000,000 shares of Series A-3 preferred
stock, $0.001 par value. At December 31, 2001, there were 800,000 shares of
Series A-3 preferred stock outstanding.
(B) Common Stock Options
During 2001 and 2000, the Company granted stock options to certain employees and
consultants. The Company applies APB Opinion No. 25 and related interpretations
in accounting for stock options issued to employees and statement of Financial
Accounting Standard #123 ("SFAS123") for options granted to non-employees.
Options granted to both employees and non-employees did not result in a fair
value greater than the exercise price and accordingly, no compensation cost was
recognized for such options issued as of December 31, 2001.
F-25
A summary of the stock options issued under the employment and consulting
agreements as of December 31, 2001 is presented below:
Number of Weighted Average
Options Exercise Price
---------------- -------------------
Stock Options
Balance, June 9, 1999 (inception) - -
Granted (none exercised or forfeited) 820,000 -
--------------- -----------------
Balance, December 31, 2000 820,000 $ 0.25
Forfeited (none granted or exercised) 442,000 0.25
--------------- ------------------
Balance, December 31, 2001 378,000 $ 0.26
=============== =================
The following table summarizes information about stock options outstanding at
December 31, 2001:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------------------------
Weighted
Number Average Weighted Number Weighted
Range Of Outstanding at Remaining Average Exercisable Average
Exercise December 31, Contractual Exercise at December Exercise
Price 2001 Life Price 31, 2001 Price
------------ ---------------- ------------- ------------ --------------- -------------
0.213-
$ 0.275 378,000 46 Months $ 0.26 378.000 $ 0.26
========== ============== ============ ========== ============= ===========
(C) Common Stock Warrants
During 2001, the Company granted warrants to employees and consultants to
purchase 490,000 and 101,852 shares of common stock at $2.50 and $0.01 per
share, respectively for a period of five years. Using the Black-Scholes model,
the warrants have no value assuming no annual dividend, volatility of 0.0001%,
risk-free interest rate of 4.86% and a term of five years.
During 2000, the Company issued warrants to purchase 247,500 shares of common
stock at $2.50 per share, of which 80,000 have been cancelled and 177,500 are
outstanding as of December 31, 2001. The Company accounts for the warrants under
APB 25 for employees and SFAS 123 for non-employees. Accordingly, no direct
offering costs or compensation expenses were recognized as of December 31, 2001
and 2000. Using the Black-Scholes model, the warrants have no value assuming no
annual dividend, volatility of 0.0001%, risk-free interest rate of 6.58% and a
term of five years.
NOTE 9 - LEGAL PROCEEDINGS
On May 23, 2001, Interactive Information Services, Inc. ("ITS") obtained a
judgment in the General Court of Justice, Superior Court of Wake County in the
amount of $85,076. This lawsuit originated from a breach of liability accrued on
the acquisition of a software contract. ITS has domesticated the judgment in the
state of Nevada. The liability for this judgment is included in accounts payable
at December 31, 2001 and in January 2002, the judgment was paid and satisfied.
NOTE 10 - GOING CONCERN
As reflected in the accompanying financial statements, the Company has
accumulated losses of $4,524,032 since inception, a working capital deficiency
of $1,376,245, a stockholders' deficiency of $1,620,845 and a negative cash flow
from operations of $1,222,163. The ability of the Company to continue as a going
concern is dependent on the Company's ability to raise additional funds and
implement its business plan. Management plans to continue marketing its products
to healthcare organizations and benefit plan sponsors while pursuing
opportunities for equity or debt financing from various sources as well as other
business combinations or alliances to enhance its product offerings and
marketing capabilities. There are no assurances that these plans will be
implemented. The accompanying financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
F-26
NOTE 11 - SUBSEQUENT EVENTS
On January 18, 2002, the Company entered into a merger agreement with Base Ten
Systems, Inc., a public company ("Base Ten"), providing for the shareholders of
the Company to receive 75% of Base Ten's common stock outstanding after the
merger. The merger agreement is subject to approval by Base Ten's shareholders
and by the stockholders' of the Company at the 2002 annual meeting. In January
2002, in accordance with the merger agreement, Base Ten acquired 1,000,000
shares of the Company's Series A-3 preferred stock for $250,000 to provide the
Company with funds to meet working capital requirements.
The Company was obligated to holders of its convertible notes in the aggregate
principal amount of $1,000,000 at December 31, 2001. See Notes 4(A) and (B). The
notes were convertible at the option of the Company into its Series A-3
preferred stock upon reaching certain financial milestones. On January 31, 2002,
having achieved those milestones, the Company exercised its conversion option
and issued the note holders a total of 2,536,320 shares of its Series A-3
preferred stock upon conversion of the notes. Since the conversion price
specified in notes was greater than the fair value of the Series A-3 preferred
stock, as determined by the Company and reflected in subsequent Series A-3
preferred share issuance prices, no beneficial conversion feature has been
associated with the issuance of the notes for financial reporting purposes.
At the end of 2001, the Company was pursuing negotiations with various corporate
sponsors of employee benefits plans for their employees' access to the Company's
e-health resources. As of March 31, 2002, the Company had. contracts generating
approximately $2,000 in monthly fees for these services.
F-27
Form of Proxy Card
Front:
- --------------------------------------------------------------------------------
BASE TEN SYSTEMS, INC.
(THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS)
BASE TEN SYSTEMS, INC.-Proxy for the Special Meeting of
Shareholders at 9:00 a.m.
October 25, 2002, at 200 Campus Drive, Morristown, New Jersey 07962
The undersigned hereby appoints Edward J. Klinsport and Kenneth W.
Riley, and each of them, with full power of substitution, as Proxies to vote the
Common Stock of the undersigned at the referenced Special Meeting, and any
adjournments thereof, upon the matters set forth in the Notice of Special
Meeting and Proxy Statement, as follows:
1. SALE OF CLINICAL SOFTWARE BUSINESS: [ ] FOR [ ] ABSTAIN [ ] AGAINST
2. SHARE COMBINATION: [ ] FOR [ ] ABSTAIN [ ] AGAINST
3. MERGER WITH CONVERGENCE: [ ] FOR [ ] ABSTAIN [ ] AGAINST
4. NEVADA REINCORPORATION AND
NAME CHANGE: [ ] FOR [ ] ABSTAIN [ ] AGAINST
5. 2002 STOCK OPTION PLAN: [ ] FOR [ ] ABSTAIN [ ] AGAINST
This Proxy will be voted as specified. If no specification is made, it will
be voted FOR EACH Proposal. Approval of Proposals 2, 4 and 5 are conditions to
the Merger contemplated by Proposal 3.
================================================================================
Back:
- --------------------------------------------------------------------------------
Any Proxy heretofore given by the undersigned with respect to such stock is
hereby revoked. Receipt of the Notice of Special Meeting and Proxy Statement is
hereby acknowledged.
Do you plan to attend the Meeting? [ ] Yes [ ] No
Please mark, sign, date and return
the Proxy Card promptly using the
enclosed envelope.
DATED:__________________, 2002
__________________________________
__________________________________
(Joint owners must EACH sign.
Please sign EXACTLY as your
name(s) appear(s) on the card.
When signing as attorney, trustee,
executor, administrator, guardian
or corporate officer, please give
your FULL title.)