from SEC filing
Dear Shareholder:
I am writing to you to explain the rationale of your Board in presenting
the transactions contained within the enclosed Proxy Statement. The two
underlying strategies we have adopted are to reorganize the Company from a
business focus standpoint and to propose certain measures which would give the
Company the flexibility to deal with pressing matters which may be affecting the
Company's stock price.
Dealing with the business issues first, we have decided to sell the
acoustics operation to PCB Group, Inc. From a strategic standpoint, we believe
it is difficult to effectively operate our acoustics business as a global
business with sales of only $7 million and with a limited infrastructure. Over
the past few months, we have explored ways to grow this business ourselves in a
more aggressive manner by either buying complementary companies, partnering, or
from internal growth spearheaded by new product development.
Given the historically fragile state of the Company's finances, none of
these options has proven to be attractive or feasible when balanced against the
risks involved and the resources of the Company. Consequently, the Company
decided to explore alternatives for maximizing the amount it could realize from
the sale of the acoustics business. PCB is a fast growing and relatively
significant player in the acoustics and vibration industry and was able to
justify payment of an attractive price for the acoustics business as a way to
continue its expansion.
As you can see from the enclosed financials, the acoustics business lost in
excess of $3 million in 1997 and has traded at only break-even in the first nine
months of 1998. A significant turnaround has been achieved for this business
that is still ongoing. PCB has agreed to purchase this business on the basis
that this turnaround will be completed this year and the full impact of the cost
saving measures will be delivered in 1999. The transaction, therefore, involves
an up front payment of $5 million in cash and a note payable over one year of
$1.5 million. PCB will also assume $1.8 million in liabilities associated with
the business. In addition, up to $2 million is payable upon achievement of
projections we prepared.
Jeffrey Cohen, COO of the Company, in conjunction with his Sensar duties,
will continue to run the acoustics business under the guidance of PCB once the
transaction is completed and until the end of the earn out period. Although it
is difficult to predict the future, we consider the projections outlined to PCB
to be achievable.
The other major factor considered by the Company in deciding to sell the
acoustics business relates to its financing arrangements. Historically, the
Company has been financed by the exercise of warrants and options with the
subsequent dilution to the shareholders of Common Stock. In early 1998, the
holders of warrants declined to continue to exercise their warrants as a result
of the precipitous decline in the Company's stock price. Partially as a result
of the termination of ongoing equity financing, a $1 million line of credit was
called for renegotiation on onerous terms and the Company elected to repay this
debt. In urgent need for further rapid financing, the Company entered into a
private placement of preferred shares.
Aggressive terms attached to this financing, although it was not envisioned
that the impact of the conversion of these preferred shares would be materially
dilutive to the shareholders of Common Stock given the prevailing stock price at
that time. However, as the stock price continued to fall during the subsequent
months, the impact of this conversion has increased proportionately, creating a
very material overhang in the stock market. It is now difficult to attract new
buyers to the stock even at the currently depressed levels.
As a result of the low price of the stock, the Company is under threat of
delisting from Nasdaq in the absence of any remedial measures.
Without the sale of the acoustics business, the Company is unable to redeem
the Series A Preferred Stock and eliminate the overhang from its own resources.
Access to commercial financing is not available due to the historically high
level of losses and further access to the equity markets is not a viable option.
The Company was, therefore, faced with the dilemma of allowing a potentially
disorderly conversion which would result in very significant dilution of the
Common Stock or finding a way to eliminate or minimize the impact of the
preferred conversion. Simply permitting the conversion to occur on the current
terms would crystallize delisting from Nasdaq and make any return extremely
difficult due to the dilutive nature of the conversion.
We have negotiated an agreement with the holders of almost all of the
Series A Preferred Stock that will permit us to repurchase that stock. The sale
of the acoustics business would result in sufficient cash to permit the Company
to complete this transaction. In this document however, we have asked you to
provide us with the flexibility to allow conversion by increasing the allowable
dilution above the 20% restriction required by Nasdaq and contained within our
articles.
We have asked for this flexibility for two reasons. First, we would like
to explore possible uses of the cash and related proceeds of the sale of the
acoustics business for acquisition opportunities, which will allow us to begin
to enhance shareholder value by other avenues in addition to our technology
development. Second, the Company has now substantially eliminated its loss
position and repositioned its product line sufficiently that the future outlook
is significantly more attractive. This may allow alternative equity investors
to be attracted allowing any potential conversion from the existing preferred
shareholders to be carried out in an orderly manner. This would leave the
Company in a strong cash position enabling several alternative strategies to be
adopted.
If an acquisition program is to be adopted, then the preservation of the
Nasdaq listing will be a critical element of the strategy. We have, therefore,
also asked for the flexibility to consider a reverse split for the stock. Our
review of other companies indicates that quite often reverse splits do not
result in a long-term price increase for the stock. However, in certain
circumstances, reverse splits do achieve their goals when associated with
positive announcements and a more comprehensive reorganization similar to what
is being presented in the Proxy Statement.
As a result of the sale of the acoustics business, our focus will now be
narrowed to our Jaguar mass spectrometry line and the CrossCheck resistivity
product. We announced in mid-October that we had entered into a letter of
intent with JEOL to partner with them over the next five years for development
and marketing of the Jaguar product. We have now completed the formalization of
this agreement.
From a financial perspective, JEOL will pay an up front fee of $300,000 and
will guarantee the purchase of a certain number of units. In conjunction with
this and our efforts to sign up independent distributors in Europe and Asia, we
believe that the Sensar division will trade at or near break even for 1999.
CrossCheck continues to represent a potentially significant opportunity for
the Company, although we continue to struggle to gain momentum with the product
despite interesting technological successes. At the present time, we continue
to believe that our work with our utility partner will lead to promising product
developments in early 1999.
In 1997, the Company incurred an overall loss of nearly $15 million. This
has been reduced to a loss for the nine months ended September 30, 1998, of
approximately $6 million (including approximately $3.5 million of unusual
charges). In the absence of any material changes to our market penetration, we
anticipate that in 1999 the Company overall, will have a very modest loss that
would be easily funded from the cash reserves created from the acoustics sale.
In 2000, the full impact of the JEOL transaction and additional European and
Asian distribution, as well as possibly a significant contribution from
CrossCheck, hold the promise of returning the Company to a profitable trading
position.
We are, therefore, asking you to approve the proposals as presented.
Sincerely,
Andrew Bebbington
Chairman of the Board and
Chief Executive Officer |
