SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998 Commission File No. 0-7100
BASE TEN SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-1804206
(State of incorporation) (I.R.S. Employer
Identification No.)
ONE ELECTRONICS DRIVE
TRENTON, N.J. 08619
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 586-7010
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. YES /x/ NO /_/
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date.
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TITLE OF CLASS OUTSTANDING AT NOVEMBER 13, 1998
<C> <S>
Class A Common Stock, $1.00 par value 18,654,000
Class B Common Stock, $1.00 par value 75,236
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BASE TEN SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
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Part I. Financial Information Page
Consolidated Balance Sheets - September 30, 1998 (unaudited)
and October 31, 1997 (audited)................................................ 1
Consolidated Statements of Operations -- Three months and nine months
ended September 30, 1998 and October 31, 1997 (unaudited)..................... 2
Consolidated Statements of Shareholders' Equity - Nine
months ended September 30, 1998 (unaudited)................................... 3
Consolidated Statements of Cash Flows -- Nine months ended
September 30, 1998 and October 31, 1997 (unaudited)........................... 4
Notes to Consolidated Financial Statements.................................... 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................... 10
Part II. Other Information
Item 2: Changes in Securities..................................... 18
Item 4: Submission of Matters to a Vote of Security Holders....... 19
Item 6: Exhibits and Reports on Form 8-K.......................... 20
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BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
AS OF AS OF
SEPTEMBER 30, 1998 OCTOBER 31, 1997
------------------ ----------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash.......................................................................... $ 2,103,000 $ 1,502,000
Accounts receivable (including unbilled receivables of $698,000 at
September 30, 1998 and $1,444,000 at October 31, 1997)..................... 4,718,000 1,808,000
Net assets held for sale...................................................... -- 5,338,000
Other current assets.......................................................... 1,170,000 1,044,000
--------------- --------------
TOTAL CURRENT ASSETS........................................................ 7,991,000 9,692,000
PROPERTY, PLANT AND EQUIPMENT....................................................... 5,090,000 4,305,000
NOTE RECEIVABLE..................................................................... 1,975,000 --
OTHER ASSETS........................................................................ 6,540,000 7,220,000
--------------- --------------
$ 21,596,000 $ 21,217,000
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................. $ 1,342,000 $ 962,000
Accrued expenses............................................................. 3,903,000 6,005,000
Current portion of capital lease obligation.................................. 54,000 54,000
--------------- --------------
TOTAL CURRENT LIABILITIES.................................................. 5,299,000 7,021,000
LONG TERM LIABILITIES:
Long-term debt............................................................... 10,000,000 15,500,000
Capital lease obligation..................................................... 3,375,000 3,425,000
Other long-term liabilities.................................................. 228,000 253,000
--------------- --------------
TOTAL LONG-TERM LIABILITIES................................................ 13,603,000 19,178,000
SHAREHOLDERS' EQUITY (DEFICIENCY)
Series A Preferred Stock, $1.00 par value,
997,801 shares authorized; issued and outstanding 18,178 shares at 18,000 --
September 30, 1998.........................................................
Class A Common Stock, $1.00 par value,
40,000,000 shares authorized; issued and outstanding 10,477,221
shares at September 30, 1998 and 7,768,952 shares at October 31, 1997...... 10,477,000 7,769,000
Class B Common Stock, $1.00 par value,
2,000,000 shares authorized; issued and outstanding 77,236
shares at September 30, 1998 and 445,121 shares at October 31, 1997....... 77,000 445,000
Additional paid-in capital................................................... 51,450,000 29,458,000
Deficit...................................................................... (59,054,000) (42,647,000)
--------------- --------------
2,968,000 (4,975,000)
Equity adjustment from foreign currency translation.......................... (349,000) (150,000)
Unrealized gain on securities available for sale............................. 75,000 143,000
--------------- --------------
TOTAL SHAREHOLDERS' EQUITY................................................. 2,694,000 (4,982,000)
--------------- --------------
$ 21,596,000 $ 21,217,000
=============== ==============
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 OCTOBER 31, 1997 SEPTEMBER 30, 1998 OCTOBER 31, 1997
------------------ ---------------- ------------------ ----------------
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REVENUE
Sales...................................... $ 2,708,000 $ 925,000 $ 5,670,000 $ 2,282,000
------------- ------------ -------------- --------------
COSTS AND EXPENSE:
Cost of sales.............................. 1,496,000 1,414,000 5,825,000 3,107,000
Amortization of software development costs. 994,000 1,830,000 2,805,000 2,608,000
Research and development................... 186,000 49,000 519,000 133,000
Sales and marketing........................ 1,543,000 882,000 3,755,000 2,181,000
General and administrative................. 1,527,000 6,318,000 4,654,000 7,316,000
------------- ------------ -------------- --------------
5,746,000 10,493,000 17,558,000 15,345,000
------------- ------------ -------------- --------------
OPERATING LOSS.................................. (3,038,000) (9,568,000) (11,888,000) (13,063,000)
OTHER INCOME (EXPENSE).......................... (202,000) (473,000) (645,000) (1,211,000)
------------- ------------ -------------- --------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME
TAX BENEFIT (3,240,000) (10,041,000) (12,533,000) (14,274,000)
INCOME TAX BENEFIT.............................. -- -- -- --
------------- ------------ -------------- --------------
NET LOSS FROM CONTINUING OPERATIONS............. (3,240,000) (10,041,000) (12,533,000) (14,274,000)
------------- ------------ -------------- --------------
DISCONTINUED OPERATIONS:
LOSS FROM DISCONTINUED OPERATIONS............... -- (4,721,000) -- (5,738,000)
------------- ------------ -------------- --------------
NET LOSS........................................ $ (3,240,000) $(14,762,000) $ (12,533,000) $ (20,012,000)
============= ============ ============== ==============
LOSS PER COMMON SHARE:
Continuing Operations....................... $ (.36) $ (1.25) $ (1.51) $ (1.80)
Discontinued Operations..................... -- (.59) -- (.72)
------------- ------------ -------------- --------------
NET LOSS PER COMMON SHARE........................ $ (.36) $ (1.83) $ (1.51) $ (2.52)
============= ============ ============== ==============
WEIGHTED AVERAGE COMMON SHARES.................. 10,148,500 8,058,100 9,205,900 7,936,700
------------- ------------ -------------- --------------
LOSS PER COMMON SHARE-ASSUMING DILUTION:
Continuing Operations..................... $ (.36) $ (1.25) $ (1.51) $ (1.80)
Discontinued Operations................... -- (.59) -- (.72)
------------- ------------ -------------- --------------
NET LOSS PER COMMON SHARE-ASSUMING DILUTION..... $ (.36) $ (1.83) $ (1.51) $ (2.52)
============= ============ ============== ==============
WEIGHTED AVERAGE COMMON SHARES-ASSUMING DILUTION 10,148,500 8,058,100 9,205,900 7,936,700
------------- ------------ -------------- --------------
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
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Common Stock Preferred Stock
------------------------------------- --------------- Additional
Class A Class B Paid-in
Shares Amount Shares Amount Shares Amount Capital Deficit
------ ------ ------ ------ ------ ------ ------- -------
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Balance-
December 31, 1997 7,828,719 $7,829,000 445,121 $ 445,000 9,375 $ 9,000 $37,991,000 $(46,521,000)
Conversions of:
Class B Common
to Class A Common 559,242 559,000 (372,831) (373,000) -- -- (186,000) --
Preferred Stock
to Class A Common 417,468 417,000 -- -- (2,199) (2,000) (415,000) --
Convertible
Debenture to
Class A Common 1,490,805 1,491,000 -- -- -- -- 4,009,000 --
Exercise of options 150,232 150,000 4,946 5,000 -- -- 525,000 --
Issuance of Common
Stock 30,755 31,000 -- -- -- -- 157,000 --
Issuance of Preferred
Stock -- -- -- -- 11,002 11,000 9,369,000 --
Foreign currency
translation -- -- -- -- -- -- -- --
Unrealized gain on
securities
available for sale -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- (12,533,000)
---------- ----------- ------ ------- ----- ------- ----------- ------------
Balance -
September 30, 1998 10,477,221 $10,477,000 77,236 $77,000 18,178 $18,000 $51,450,000 $(59,054,000)
========== =========== ====== ======= ====== ======= =========== ============
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Equity
Adjustment Unrealized
From Gain on
Foreign Securities
Currency Available
Translation for Sale
----------- --------
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$ (195,000) $ 62,000
-- --
-- --
-- --
-- --
-- --
-- --
(154,000) --
-- 13,000
-- --
- ------------- --------------
$ (349,000) $ 75,000
============= ==============
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SEE NOTES TO CONSOLIDATED STATEMENTS
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BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED NINE MONTHS ENDED
---------------------------- -------------------------
SEPTEMBER 30, 1998 OCTOBER 31, 1997
------------------ ----------------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................ $ (12,533,000) $ (20,012,000)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization................................... 3,411,000 3,158,000
Compensation-related stock options and warrants................. -- 2,750,000
CHANGES IN OPERATING ASSETS AND LIABILITIES, EXCLUDING
EFFECTS OF DISCONTINUED BUSINESS:
Accounts receivable............................................. (3,135,000) 1,075,000
Inventory ...................................................... 321,000 131,000
Employee loan receivable - net of current portion............... -- 121,000
Other current assets............................................ (627,000) (62,000)
Accounts payable and accrued expenses........................... (541,000) 3,732,000
Other assets.................................................... (1,346,000) (2,091,000)
------------- -------------
NET CASH USED IN OPERATIONS..................................... (14,450,000) (11,198,000)
------------- -------------
CASH FLOWS USED IN INVESTING
ACTIVITIES:
Additions to property, plant and equipment-net.................. (533,000) (142,000)
Purchase of assets related to FlowStream product................ (2,068,000) --
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES........................... (2,601,000) (142,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of amounts borrowed................................... (58,000) (54,000)
Proceeds from issuance of long-term debt........................ -- 5,500,000
Proceeds from issuance of common and preferred stock............ 10,248,000 1,992,000
------------- -------------
NET CASH PROVIDED FROM FINANCING
ACTIVITIES...................................................... 10,190,000 7,438,000
------------- -------------
Effect of exchange rates on cash................................ (154,000) 131,000
------------- -------------
NET INCREASE (DECREASE) IN CASH....................................... (7,015,000) (3,771,000)
CASH, beginning of period............................................. 9,118,000 5,273,000
------------- -------------
CASH, end of period................................................... $2,103,000 $ 1,502,000
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................ $ 826,000 $ 807,000
------------- -------------
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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A. DESCRIPTION OF BUSINESS
Base Ten Systems, Inc. ("Base Ten" or the "Company") is engaged in the
development of commercial applications focused on manufacturing execution
systems, medical screening and image processing software. For the period ended
October 31, 1997, the Company was also engaged, through its Government
Technology Division, in the design and manufacture of electronic systems
employing safety critical software for the defense industry. Effective December
31, 1997, the Government Technology Division was sold by the Company. See Note D
below.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. In management's opinion, all adjustments necessary for a fair
presentation of the financial statements are reflected in the
accompanying statements.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
The consolidated interim financial statements should be read in
conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1997. The results of operations
for the three months and nine months ended September 30, 1998
are not necessarily indicative of the operating results for the
full year.
As a result of the change of the fiscal year end from October
31st to December 31st, the quarterly comparisons are between the
third calendar quarter for 1998 and the fourth fiscal quarter
for 1997, as indicated in the financial statements. The third
quarter of 1998 includes the months of July, August and
September; the comparative fourth quarter of fiscal year 1997
includes the months of August, September and October. Although
there is a difference of one calendar month, management does not
believe that the difference is significant.
2. Basis of Presentation - The consolidated financial statements
include the accounts of Base Ten and its subsidiaries. All
significant inter-company accounts, transactions and profits
have been eliminated. As discussed more thoroughly in Note D,
the results of operations of the Government Technology Division
have been reported separately as discontinued operations for the
period ended October 31, 1997. Net assets of the GTD were sold
to Strategic Technology Systems, Inc. ("STS") at the close of
business on December 31, 1997 and as such are not presented at
September 30, 1998. Net assets of the GTD are reported as net
assets held for sale at October 31, 1997.
3. Recently Issued Accounting Standards - In February 1997, the
Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 applies to
entities with publicly held common stock or potential common
stock and is effective for financial statements issued for
periods ending after December 15, 1997. Accordingly, the Company
implemented SFAS No. 128 for periods ended after December 15,
1997 (see Note B-4).
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, "Reporting Comprehensive Income" ("SFAS no.
130"). SFAS No. 130 applies to all companies and is effective
for fiscal years beginning after December 15, 1997. SFAS No. 130
establishes standards for the reporting and display of
comprehensive income in a set of financial statements.
Comprehensive income is defined as the change in net assets of a
business enterprise during a period from transactions generated
from non-owner sources. It includes all changes in equity during
a period except those resulting from investments by owners and
distributions to owners. Management believes that the adoption
of SFAS No. 130 will not have a material impact on the financial
statements.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 131 "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS No. 131"). SFAS No. 131 applies
to all public companies and is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 requires that
business segment financial information be reported in the
financial statements utilizing the management approach. The
management approach is defined as the manner in which management
organizes the segments within the enterprise for making
operating decisions and assessing performance. The Company has
only one operating segment - providing software products and
services to FDA regulated industries. Management believes the
adoption of SFAS No. 131 will not have a material impact on the
financial statements.
In October 1997, the American Institute of Certified Public
Accountants issued Statement of Position 97-2, "Software Revenue
Recognition," ("SOP 97-2") which is effective for transactions
entered into in fiscal years beginning after December 15, 1997.
The Statement of Position governs the recognition of revenue by
enterprises that license, sell, lease or otherwise market
software, except where software is incidental to the products or
services being offered as a whole. Application of this Statement
of Position has not had a material impact on the financial
statements.
4. Net Loss Per Share
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard ("FAS") No.
128, "Earnings per Share". FAS No. 128 specified the
computation, presentation and disclosure requirements for
earnings per share ("EPS") and became effective for both interim
and annual periods ending after December 15, 1997. All prior
period EPS data has been restated to conform to the provisions
of FAS No. 128. The following is a reconciliation of the
numerators and denominators used to calculate loss per share
before extraordinary loss in the Consolidated Statements of
Operations:
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THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -----------------------------
SEPTEMBER 30, OCTOBER 31, SEPTEMBER 30, OCTOBER 31,
-------------- ---------------- ----------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
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Loss per common share:
Net Loss................................................. $ (3,240,000) $ (14,762,000) $ (12,533,000) $ (20,012,000)
Less: Preferred stock dividends......................... (443,000) -- (1,376,000) --
-------------- -------------- ------------- -------------
Net Loss to common shareholders (numerator).............. $ (3,683,000) $ (14,762,000) (13,909,000) $ (20,012,000)
Weighted average shares (denominator).................... 10,148,509 8,058,052 9,205,927 7,936,745
-------------- -------------- ------------- -------------
Net loss per common share............................ $ (.36) $ (1.83) $ (1.51) $ (2.52)
============== ============== ============= =============
Loss per common share-assuming dilution:
Net Loss................................................. $ (3,240,000) (14,762,000) (12,533,000) (20,012,000)
Less: Preferred stock dividends......................... $ (443,000) $ -- $ (1,376,000) $ --
-------------- -------------- ------------- -------------
Net Loss to common shareholders (numerator).............. $ (3,683,000) $ (14,762,000) $(13,909,000) $ (20,012,000)
============== ============== ============= =============
Weighted average shares.................................. 10,148,509 8,058,052 9,205,927 7,936,745
Effect of Dilutive Options/Warrants -- -- -- --
-------------- -------------- ------------- -------------
Weighted averages shares-assuming dilution (denominator) 10,148,509 8,058,052 9,205,927 7,936,745
-------------- -------------- ------------- -------------
Net loss per common share............................ $ (.36) (1.83) $ (1.51) (2.52)
============== ============== ============= =============
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During the three and nine-month periods ended September 30, 1998
and October 31, 1997, there were no outstanding options included
in the computation of diluted EPS as the Company had a net loss,
and the effect of stock options, warrants and stock conversions
would be anti-dilutive to earnings per share.
1. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these
estimates.
2. Investments - The Company accounts for its investments using
Statement of Financial Accounting Standard No. 115, "Accounting
for Certain Investments in Debt and Equity Securities"("FAS No.
115"). This standard requires that certain debt and equity
securities be adjusted to market value at the end of each
accounting period. Unrealized market value gains and losses are
charged to earnings if the securities are traded for short-term
profit. Otherwise, such unrealized gains and losses are charged
or credited to a separate component of shareholders' equity.
Management determines the proper classifications of investments
in obligations with fixed maturities and marketable equity
securities at the time of purchase and reevaluates such
designations as of each balance sheet date. At September 30,
1998 and October 31, 1997, all securities covered by FAS No. 115
were designated as available for sale. Accordingly, these
securities are stated at fair value, with unrealized gains and
losses reported in a separate component of shareholders' equity.
Securities available for sale at September 30, 1998 and October
31, 1997, consisted of common stock with a cost basis of $50,000
and $150,000. Differences between cost and market of $75,000 and
$143,000 were included as a separate component of shareholder's
equity, "unrealized gain on securities available for sale", as
of September 30, 1998 and October 31, 1997, respectively.
3. Reclassifications - Certain reclassifications have been made to
prior year financial statements to conform to the current year
presentation.
C. ACQUISITIONS
On February 19, 1998, the Company acquired certain assets and assumed
certain liabilities of Consilium, Inc. ("Consilium"), for approximately
$2,068,000, including transaction costs. This acquisition has been
accounted for under the purchase method. Intangible assets of
$2,450,000, which are included in other assets, are being amortized on
the straight-line method over periods not exceeding fifteen years. The
agreement also provides for additional payments based upon a percentage
of the excess of targeted sales of the "FlowStream" product line, as
defined, for the years ended December 31, 1998 and 1999, respectively.
D. DISCONTINUED OPERATIONS
On October 27, 1997 the Company entered into an agreement to sell its
Government Technology Division ("GTD") to Strategic Technology Systems,
Inc. ("STS"). Accordingly, the operating results of the GTD have been
segregated from continuing operations and reported as a separate line
item on the consolidated statements of operations for the three and
nine-month periods ended October 31, 1997.
The net assets of the GTD were sold to STS at the close of business on
December 31, 1997, and as such are not presented at September 30, 1998.
The net assets of the GTD are included in the consolidated balance sheet
as of October 31, 1997 under "Net Assets Held For Sale."
The agreement between the Company and STS, in general, required that the
selling price of the net assets, on the closing date of December 31,
1997, be equal to the lower of the aggregate net asset value as of
October 31, 1997 or December 31, 1997. The net asset value at October
31, 1997 and December 31, 1997 was $5,338,000 and $5,075,000,
respectively. As a result, the final net asset value was recorded at
$5,075,000 between the Company and STS.
In consideration for the value of the net assets sold, the Company
received $3,500,000 in cash, and an unsecured promissory note for
$1,975,000. This amount represents the difference between (i) the final
amount of the net assets of GTD as of the closing date plus $400,000,
and (ii) $3,500,000. The note will have a five year term bearing
interest at a rate of 7.5% per annum, payable quarterly. Principal
payments under the note will amortize over a three year period beginning
on the second anniversary of the closing. The note also provides for
accelerated payment of principal and interest upon the occurrence of
certain events.
In addition, the Company will receive a $400,000 contingent payment
provided STS is in receipt of a certain order from one of its customers.
The amount will be payable $100,000 per fiscal quarter beginning three
months after STS receives such order.
The Company will also receive a warrant from STS exercisable for that
number of shares of the voting common stock of STS which equals 5% of
the issued and outstanding shares of common stock and common stock
equivalents immediately following and giving effect to any initial
underwritten public offering by STS. In the event that STS is sold,
merged or liquidated prior to any such initial underwritten public
offering, the Company will receive 15% of the gross proceeds of such
transaction that are in excess of $7 million, and the warrant described
above will be cancelled.
The Company has subleased to STS approximately 30,000 square feet of
space plus allowed the use of 10,000 square feet of common areas for a
period of five years at an annual rental of $240,000 for the first three
years and $264,000 for each of the last two years of the sublease.
E. SUBSEQUENT EVENTS
On November 10, 1998, the Company held a Special Meeting of
Shareholders. At the meeting, the following were approved by the
shareholders: (1) an amendment to the Certificate of Incorporation to
increase the authorized Class A Common Stock from 40 million to 60
million shares, (2) the sale and issuance of Series B Convertible
Preferred Stock (subject to the execution of definitive agreements), (3)
the issuance of Class A Common Stock Purchase Warrants to the Series A
Preferred Stockholders that would receive Series B Convertible Preferred
Stock, (4) the modification of the outstanding $10 million 9.01%
Convertible Subordinated Debenture, (5) the sale and issuance of up to
6,666,666 shares of Class A Common Stock at a purchase price of $3.00
per share, and Warrants to purchase up to 1,000,000 shares of Class A
Common Stock, (6) the amendment to the 1998 Directors' Stock Option
Plan, and (7) the amendment to the 1998 Stock Option and Stock Award
Plan. On July 24, 1998 the Company filed three Registration Statements
on Form S-8 with the Securities and Exchange Commission to register the
equity plans referred to in items (6) and (7) above.
The sale and issuance of Series B Convertible Preferred Stock ("Series B
Shares") would be to the Series A Convertible Preferred Stockholders in
the form of an even exchange for Series A Convertible Preferred Stock
("Series A Shares"). The terms of the Series B Shares are similar to the
Series A Shares, except that: (a) the Series B Shares would have a
conversion price of $4.00, whereas the conversion price of the Series A
Shares is equal to the lesser of ( i ) $16.25 or (ii) the Weighted
Average Price (as defined) of the Class A Common Stock prior to the
conversion date; and (b) the Series B Shares, as a result of the fixed
conversion price of $4.00, would not provide the holder with the option
to receive a subordinated 8% promissory note, as the Series A Shares
provides.
The issuance of Class A Common Stock Purchase Warrants to the Series A
Preferred Stockholders that would receive Series B Convertible Preferred
Stock provides for the issuance of 80,000 Class A Common Stock Purchase
Warrants for each $1 million of principal amount of the Series A Shares
outstanding on November 10, 1998 in addition to certain other Series A
Shares which were converted at $4.00 per share between September 1, 1998
and November 10, 1998. These purchase warrants are four-year warrants
exercisable at $3.00, and provide for mandatory exercise upon the
occurrence of certain events.
The modification of the $10 million 9.01% Convertible Subordinated
Debenture would decrease the conversion price at which the debenture is
convertible into shares of Class A Common Stock from $12.50 to $4.00.
SALE AND ISSUANCE OF $20 MILLION CLASS A COMMON STOCK AND WARRANTS
On November 13, 1998, in order to provide additional equity to the
Company, the Company sold 6,666,666 shares of Class A Common Stock at a
purchase price of $3.00 per share for aggregate proceeds of $20,000,000
and net proceeds of $18.8 million, net of commissions and expenses. For
each $1 million of Class A Common Stock purchased, the purchaser
received seven-year warrants to purchase 50,000 shares of Class A Common
Stock, exercisable at $3.00 per share; a total of 1,000,000 warrants
were, therefore, issued to the purchaser. The placement agent also
received warrants to purchase up to 250,000 shares of Class A Common
Stock.
<PAGE>
The following pro-forma balance sheet represents the effect of the sale
and issuance of $20 million Class A Common Stock by the Company on November 13,
1998, as described above.
<TABLE>
<CAPTION>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
ACTUAL AS OF PRO-FORMA AS OF
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash................................................... $ 2,103,000 $ 20,903,000
Accounts receivable.................................... 4,718,000 4,718,000
Other current assets................................... 1,170,000 1,170,000
--------------- ---------------
TOTAL CURRENT ASSETS................................. 7,991,000 26,791,000
GOODWILL (net of amortization)............................... 22,000 22,000
OTHER ASSETS................................................. 13,583,000 13,583,000
--------------- ---------------
$ 21,596,000 $ 40,396,000
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES.......................................... 5,299,000 5,299,000
LONG TERM LIABILITIES:
Long-term debt......................................... 10,000,000 10,000,000
Other long-term liabilities............................ 3,603,000 3,603,000
--------------- ---------------
TOTAL LONG-TERM LIABILITIES.......................... 13,603,000 13,603,000
SHAREHOLDERS' EQUITY
Series A Preferred Stock................................ 18,000 18,000
Class A Common Stock.................................... 10,477,000 17,144,000
Class B Common Stock.................................... 77,000 77,000
Additional paid-in capital............................. 51,450,000 63,583,000
Deficit................................................ (59,054,000) (59,054,000)
--------------- ---------------
2,968,000 21,768,000
Other equity adjustments............................... (274,000) (274,000)
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY........................... 2,694,000 21,494,000
--------------- ---------------
$ 21,596,000 $ 40,396,000
=============== ===============
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
During 1997 the Company operated a Medical Technology Division (the
"MTD"), and a Government Technology Division (the "GTD"). On December 31, 1997,
following approval by shareholders, the Company sold the GTD (the "GTD Sale") to
Strategic Technology Systems, Inc. ("STS"). On January 29, 1998, the Company
elected to change its fiscal year so that the annual accounting period will
henceforth be from January 1 through December 31. This Quarterly Report on Form
10-Q, for the three and nine-month periods ended September 30, 1998, does not
include, except as indicated herein, the operations of the GTD.
STS was a newly formed corporation managed and partially owned by
individuals who were, prior to the GTD Sale, members of the Company's senior
management (the "Management Group"). Members of the Management Group were
significantly involved in the business and development of the GTD while employed
by the Company and left the Company's employ to join STS concurrently with the
GTD Sale. STS acquired substantially all of the operating assets of the GTD in
exchange for certain consideration and the assumption of certain liabilities,
pursuant to the terms and conditions set forth in an Asset Purchase Agreement
between the Company and STS dated October 27, 1997 (the "Asset Purchase
Agreement"). The Asset Purchase Agreement was filed as an exhibit to the Current
Report on Form 8-K filed by the Company with the Securities and Exchange
Commission on November 11, 1997.
The consolidated financial statements of the Company have been restated
in order to account for the operations of the GTD as discontinued operations in
view of the GTD Sale. In the restatement, all items of income and expense
attributable to GTD's operations for all periods presented have been eliminated
from consolidation and accounted for on a net basis as discontinued operations.
All assets and liabilities of the GTD were sold to STS at the close of business
on December 31, 1997, and as such are not presented at September 30, 1998.
Accordingly, the following discussion of the Company's financial condition and
the results of operations excludes the results of the discontinued operations,
except as otherwise indicated.
In February 1998, the Company purchased certain assets from Consilium,
Inc. Refer to Note C in the Notes to Consolidated Financial Statements and the
"Continuing Operations Overview" below for more information about this
acquisition.
The Company's premier product was PHARMASYST(TM), which was introduced
in 1993. Based upon the technology used in PHARMASYST(TM), the Company developed
the BASE10(TM)ME product line, formerly known as the PHARM2(TM) product line.
The Company revised its product line name in conjunction with the release of
BASE10(TM)ME version 2.3 in June 1998.
COST REDUCTION MEASURES
During the second quarter of 1998, the Company initiated cost reduction
measures, coinciding with the completion of certain development work on version
2.3 of BASE10(TM)ME. Costs were primarily reduced by downsizing the Company's
workforce by approximately 20%. The effects of the downsizing, which
approximated $3.0 million of cost reductions on an annualized basis, and other
expense reductions were evidenced in the third quarter and are anticipated to be
reflected in the fourth quarter 1998 results of operations.*
CONTINUING OPERATIONS OVERVIEW
Since 1991 the Company has been engaged in the development of products
for the regulated manufacturing industry and, most recently, computerized
Manufacturing Execution Systems ("MES") for the pharmaceutical and medical
device industries. The Company believes the demand for MES in these markets is
poised for significant growth over the next several years for a number of
reasons.* First, there is growing pressure upon the Company's customer base for
compliance with regulations promulgated by the FDA, the International Standards
Organization (ISO 9000), and other industry standards such as Good Automated
Manufacturing Practices ("GAMP"). Second, there are increasing competitive
influences brought on by the business combinations occurring in the customer
market and the purchasing power for customer products among HMOs and other
benefit programs.
The Company believes that the BASE10(TM)ME product is a premier,
standardized PC-based system running on Microsoft Windows-NT with requisite
functionality and documented support required by the pharmaceutical and medical
device industries to assist in reducing costs while remaining FDA, ISO 9000, and
GAMP compliant. The Company acquired certain assets from Consilium, Inc. in
February 1998 which broadened the Company's reach into these industries with the
addition of the FlowStream product ("BASE10(TM)FS"), a UNIX-based MES targeted
at pharmaceutical, medical device and specialty chemical customers. The Company
will continue to pursue a leadership position in this market, and intends to
explore other potential opportunities for growth in other regulated areas such
as food, cosmetics, and chemical industries through ongoing investment in these
MES products.*
The Company has received indications from customers and prospects that
compliance with industry standards is an imperative to sales. As such, efforts
have been focused on compliance with certain industry standards and the Company
believes that both BASE10(TM)ME and BASE10(TM)FS are compliant with FDA, ISO
9000, and GAMP.* As described above, there is a need for pharmaceutical and
medical device manufacturers to have MES products compliant with current Good
Manufacturing Practices (cGMP) as established by the FDA. Further, the Company
considers the additional costs of compliance with ISO 9000 and GAMP to be
prudent investments.*
Personnel are in place to address product development and enhancement,
sales and marketing, and customer support. Management believes absorbing these
expenses in advance of revenue generation is essential to facilitating market
emergence and near term growth of the Company.*
The installation of MES is a complex process involving integration of
existing hardware platform and systems. A significant factor in successful field
installation is the ability of the customer personnel to understand the system
and, in addition to participating in the required training, to accommodate the
difference between standard paper systems and electronic methodology.
For use in a manufacturing environment, the system generally has to
undergo validation in accordance with defined procedures determining its fitness
for use in a regulated environment. The Company currently has two PHARMASYST(TM)
systems installed and validated, one at a medical device manufacturing plant and
the other at a pharmaceutical manufacturing plant. There are 14 validated
BASE10(TM)FS installations at various customer sites. One additional
PHARMASYST(TM) product and four BASE10(TM)ME products are believed to have
completed customer testing necessary for validation but have not been formally
declared validated by the customer.
In 1996, the Company determined that its BASE10(TM)ME product had become
standardized and, as a result, generally, BASE10(TM)ME license fees are
recognized as revenue upon delivery of standard BASE10(TM)ME; revenue for
customization is recognized on a percent completion basis; and revenue from
other services is recognized as rendered. The Company also determined that
BASE10(TM)FS was standardized when acquired and would be accounted for in a
consistent manner with BASE10(TM)ME.
Software development expenditures are expensed as research and
development until a product attains technological feasibility. Thereafter,
expenditures are capitalized until products attain commercial viability. The
Company established technological feasibility for PHARMASYST(TM) in 1993. At
September 30, 1998 PHARMASYST(TM) and its successor, BASE10(TM)ME had a
capitalized value of $2.4 million after allowing for amortization. Development
expenditures for PHARMASYST(TM), BASE10(TM)ME and other commercial products have
consisted primarily of salaries of software engineers and quality assurance
staff plus applicable allocated overhead. The amortization period for
PHARMASYST(TM) and BASE10(TM)ME is scheduled to be completed by June 1999 and
until then will have a significant effect on earnings.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH
THREE MONTHS ENDED OCTOBER 31, 1997
CONTINUING OPERATIONS
REVENUES
Company revenues were $2.7 million in the period ended September 30,
1998 as compared to $0.9 million in the three months ended October 31, 1997.
Revenues for the three months ended September 30, 1998 were derived 54% from
software licenses, maintenance and installations, 32% from solutions services
and 14% from product enhancements, compared to revenues for the three months
ended October 31, 1997 which were primarily derived from software licenses,
installations and enhancements.
<PAGE>
COST OF SALES
Cost of sales during the period ended September 30, 1998 increased
slightly to $1.5 million from $1.4 million in the quarter ended October 31,
1997, primarily due to salary and labor-related expenses for software
development being largely expensed as incurred in the quarter ended September
30, 1998, as opposed to the quarter ended October 31, 1997 when salaries were
primarily capitalized, partially offset by the reclassification of certain
salaries from cost of sales to sales and marketing in the 1998 period. In the
quarter ended September 30, 1998, salary and labor-related expenses in cost of
sales were approximately $1.0 million.
AMORTIZATION OF SOFTWARE DEVELOPMENT COSTS
Amortization of capitalized software decreased in the 1998 period to
$1.0 million, as compared to $1.8 million in the 1997 period. This decrease
resulted from a 1997 fiscal fourth quarter adjustment to the amortization method
for fiscal year 1997, which increased the amortization costs for the quarter
ended October 31, 1997.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs increased to $186,000 in the 1998 period
as compared to $49,000 in the 1997 period. The increase is related to additional
salaries and related expenses in the 1998 period. Research and development costs
are incurred to develop future additions to the Company's current product
family.
SALES AND MARKETING EXPENSES
Company sales and marketing expenses increased significantly in the
1998 period to $1.5 million, from $0.9 million in the quarter ended October 31,
1997. This rise was mainly due to increases in sales commissions, resulting
from increased revenues, and from the reclassification of certain salaries from
cost of sales to sales and marketing.
GENERAL AND ADMINISTRATIVE EXPENSES
Company general and administrative expenses decreased significantly in
the 1998 period to $1.5 million, from $6.3 million in the comparable 1997
period. In the 1997 period, general and administrative expenses were higher than
normal, largely due to the inclusion of $2.7 million of compensation-related
stock options and warrants (valued at fair market utilizing the Black-Scholes
option pricing model) issued to non-employees for services rendered during 1997.
Also contributing to the increased expenses in the 1997 period were a $1.0
million reserve recorded to cover potential cost overruns and penalties, and
costs associated with the liquidation of the government business, including
severance payments, consulting agreements and professional fees. In the 1998
period, the aforementioned costs are not present, resulting in a significant
decrease in the 1998 period as compared to the 1997 period.
OTHER EXPENSE
Other expense decreased from $0.5 million in the 1997 period to $0.2
million in the 1998 period. Other expense in 1998 is primarily comprised of
interest expense of $0.3 million, offset by $0.1 million of other income. In the
1997 period, other expense is mainly comprised of interest expense. Interest
expense decreased in the 1998 period as a result of a reduced level of debt,
resulting from the conversion of certain convertible debentures into common
stock; other income increased in the 1998 period as a result of rental income
earned on the sublease of building space to STS, which was not present in the
1997 period.
CONTINUING LOSSES
The Company incurred a net loss of $3.2 million in the quarter ended
September 30, 1998, compared to a $10.0 million net loss from continuing
operations for the quarter ended October 31, 1997. The decreased loss was
primarily due to increased revenues of $1.8 million, combined with decreases in
software amortization of $0.8 million, general and administrative expenses of
$4.8 million, and other expenses of $0.3 million. These decreases were partly
offset by increases in cost of sales of $0.1 million, research and development
of $0.1 million, and sales and marketing of $0.7 million. The Company expects
additional losses for the fourth quarter of 1998, including amortization expense
currently estimated to be $3.7 million for the 1998 year. The Company's ability
to achieve profitable operations is dependent upon, among other things, the
completion of current development and testing activities for BASE10(TM)ME and
BASE10(TM)FS, timely delivery and successful installation and acceptance of its
systems by its customers, and successful competition in the markets in which the
Company participates.*
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH
NINE MONTHS ENDED OCTOBER 31, 1997
CONTINUING OPERATIONS
REVENUES
Company revenues were $5.7 million in the nine-month period ended
September 30, 1998 as compared to $2.3 million in the comparable period ended
October 31, 1997. Revenues for the nine months ended September 30, 1998 were
derived 45% from software licenses, maintenance and installations, 40% from
solutions services and 15% from product enhancements, compared to revenues which
were primarily derived from software licenses, installations and enhancements in
the nine-month period ended October 31, 1997.
COST OF SALES
Cost of sales during the period ended September 30, 1998 increased
significantly to $5.8 million from $3.1 million in the nine months ended October
31, 1997, primarily due to salary and labor-related expenses for software
development being largely expensed as incurred in the nine months ended
September 30, 1998 as opposed to the period ended October 31, 1997, when
salaries were primarily capitalized, partially offset by the third quarter
reclassification of certain salaries from cost of sales to sales and marketing
in the 1998 period. In the 1998 period, salary and related expenses in cost of
sales were approximately $4.5 million. The increase in costs during the 1998
period resulted largely from increased costs incurred in completing the
development of version 2.3 of Base10(TM)ME, the integration costs related to the
addition of the FlowStream product line, as well as the severance payments
related to the second quarter downsizing (See Management's Discussion and
Analysis of Financial Condition and Results of Operations - Cost Reduction
Measures).
AMORTIZATION OF SOFTWARE DEVELOPMENT COSTS
Amortization of capitalized software increased in the 1998 period to
$2.8 million, as compared to $2.6 million in the 1997 period. This increase is
attributable to the greater capitalization level of software costs in the nine
months ended September 30, 1998 versus the comparable period ended October 31,
1997, combined with the lower amount of remaining amortizable months available
to spread capitalized cost over in the 1998 period, as compared to the 1997
period.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs increased to $519,000 in the 1998 period
as compared to $133,000 in the 1997 period. This increase is related to
additional salaries and related expenses in the 1998 period. Research and
development costs are incurred to develop future additions to the Company's
current product family.
SALES AND MARKETING EXPENSES
Sales and marketing expenses significantly increased in the 1998 period
to $3.8 million, from $2.2 million in the nine months ended October 31, 1997.
The rise was mainly attributable to increases in sales commissions, resulting
from increased revenues, salaries and related expenses resulting from the hiring
of additional personnel, and from the third quarter reclassification of certain
salaries from cost of sales to sales and marketing.
GENERAL AND ADMINISTRATIVE EXPENSES
Company general and administrative expenses decreased significantly in
the 1998 period to $4.7 million, from $7.3 million in the comparable period in
1997. In the 1997 period, general and administrative expenses were high, largely
due to the inclusion of $2.7 million of compensation-related stock options and
warrants (valued at fair market utilizing the Black-Scholes option pricing
model) issued to non-employees for service rendered during 1997. Also
contributing to the large expenses in the 1997 period were a $1.0 million
reserve recorded to cover potential cost overruns and penalties, and costs
associated with the liquidation of the government business, including severance
payments, consulting agreements and professional fees. In the 1998 period, the
aforementioned costs are not present, resulting in a significant decrease in the
1998 period as compared to the 1997 period. Partly offsetting the decrease in
the 1998 period are increases in administrative salary and related expenses and
severance payments associated with the second quarter 1998 downsizing.
<PAGE>
OTHER EXPENSES
Other expenses decreased from $1.2 million in the 1997 period to $0.6
million in the 1998 period. In 1998, other expense is primarily comprised of
interest expense of $1.2 million, offset by $0.4 million of interest income and
$0.2 million of other income. In the 1997 period, other expense was mainly
comprised of interest expense. Interest expense remained consistent in the 1998
period as a result of similar average levels of debt; interest income increased
in the 1998 period as a result of higher cash balances available to earn
interest; other income increased in the 1998 period due to rental income earned
on the sublease of building space to STS, which was not present in the 1997
period.
CONTINUING LOSSES
The Company incurred a net loss of $12.5 million in the nine months
ended September 30, 1998, compared to a $14.3 million net loss from continuing
operations for the period ended October 31, 1997. The decreased loss was
primarily due to increased revenues of $3.4 million, combined with decreases in
general and administrative expenses of $2.7 million, and other expenses of $0.6
million. These decreases were partly offset by increases in cost of sales of
$2.7 million, software amortization of $0.2 million, research and development of
$0.4 million, and sales and marketing of $1.6 million. The Company expects
additional losses for the fourth quarter of 1998, including amortization expense
currently estimated to be $3.7 million for the 1998 year.* The Company's ability
to achieve profitable operations is dependent upon, among other things, the
completion of current development and testing activities for BASE10(TM)ME and
BASE10(TM)FS, timely delivery and successful installation and acceptance of its
systems by its customers, and successful competition in the markets in which the
Company participates.*
YEAR 2000 ISSUES
Some computers, software, and other equipment include programming code
in which calendar year data is abbreviated to only two digits. As a result of
this design decision, some of these systems could fail to operate or fail to
produce correct results if "00" is interpreted to mean 1900, rather than 2000.
This problem (the "Y2K Problem") is widely expected to increase in frequency and
severity as the year 2000 ("Y2K") approaches. The Company, in anticipating Y2K,
has kept the potential for this problem in mind when purchasing new computers,
software and equipment during the past year. The Company has considered this
problem when developing new products for sale to customers.
COMPANY READINESS. The Y2K Problem could affect computers, software, and
other equipment used, operated, or maintained by the Company. Accordingly,
during the second quarter of 1998, the Company formed an internal Y2K committee
whose goal is to minimize any disruptions of the Company's business and to limit
the Company's liabilities resulting from the Y2K Problem. As a result, the
Company is reviewing its internal computer programs and systems, as well as the
software that the Company develops and sells to customers, to determine if the
programs and systems will be Y2K compliant.
INFORMATION TECHNOLOGY SYSTEMS. During the first quarter of 1998, the
Company, in anticipation of the year 2000, replaced its existing financial
accounting software system, which the Company deems to be a business-critical
system, with a system which is vendor-certified Y2K compliant from an industry
leader in financial accounting software.
The Company believes that it has identified substantially all of the
major computers, software applications, and related equipment used in connection
with its internal operations that must be replaced or upgraded to minimize the
possibility of a material disruption to its business. The Company presently
believes that computer systems which are not currently Y2K-compliant will be
replaced or upgraded in the normal replacement cycle prior to 2000.
SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS. In addition to
computers and related systems, the operation of office and facilities equipment,
such as fax machines, photocopiers, telephone switches, security systems, and
other common devices may be affected by the Y2K problem. The Company is
currently assessing the potential effect of, and costs of remediating, the Y2K
Problem on its office and facilities equipment, however, it currently believes
that the risk of business interruption due to this equipment is minimal.
SOFTWARE SOLD TO CUSTOMERS. The Company believes that it has
substantially identified and resolved all potential Y2K Problems with its latest
MES software release, version 2.3 of BASE10(TM)ME, as well as with version 3.4
and later versions of BASE10(TM)FS. However, management also believes that it is
not possible to determine with complete certainty that all Y2K Problems
affecting the Company's software products have been identified or corrected due
to complexity of these products and the fact that these products interact with
other third party vendor products and operate on computer systems which are not
under the Company's control.
Certain customers have earlier versions of the Company's MES software,
PHARM2(TM) (prior to version 2.3) and PHARMASYST(TM) which have not yet been
tested by the Company for Y2K compliance. All of the customers that have
purchased these earlier versions have had substantial customization done, which
dictates that Y2K testing and modifications must be done on a case by case
basis. These customers have been notified of the Company's willingness and
ability to provide Y2K test specifications and/or manpower to help bring their
version of the Company's software into Y2K compliance. It is a small number of
customers that still operate with these earlier versions, and the Company
believes that it can bring these earlier versions of the Company's software
product into Y2K compliance without any material additional financial or human
resources.
Also, some customers have earlier versions of BASE10(TM)FS (prior to
version 3.4) which have not been tested for Y2K compliance. However, the Company
has a standard upgrade path in place for bringing all of these earlier versions
into Y2K compliance. The upgrade has been made available and customers are
currently planning the timing of when they will perform the upgrade. The Company
believes that this upgrade can be provided with minimal use of financial and
human resources, due to the standardized nature of this upgrade path.
COSTS OF COMPLIANCE. The Company currently believes that its computer
systems will be Y2K compliant in a timely manner, and estimates the total costs
to the Company of completing any required replacements or upgrades of these
internal systems will not have a material adverse effect on the Company's
business or results of operations, although no assurances can be given. Any
costs incurred are being funded with cash flows from operations. This estimate
is being monitored and will be revised as additional information becomes
available.
THIRD PARTY SUPPLIERS. The Company has initiated communications with
third party suppliers of the major computers, software, and other equipment
used, operated, or maintained by the Company to identify and, to the extent
possible, to resolve issues involving the Y2K Problem. While the majority of the
Company's significant suppliers are software industry leaders and have committed
to upgrades to resolve any Y2K Problems, the Company has limited or no control
over the actions of these third party suppliers. Thus, while the Company expects
that it will be able to resolve any significant Y2K Problems with these systems,
there can be no assurance that these suppliers will resolve any or all Y2K
Problems with these systems before the occurrence of a material disruption to
the business of the Company or any of its customers. Any failure of these third
parties to resolve Y2K Problems with their systems in a timely manner could, but
is not currently expected to, have a material adverse effect on the Company's
business, financial condition, and results of operations.
MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS. The Company expects to
identify and resolve all Y2K Problems that could have a material adverse effect
on its business operations. However, management believes that it is not possible
to determine with complete certainty that all Y2K Problems affecting the Company
have been identified or corrected. It is not possible to accurately predict how
many Y2K Problem-related failures will occur or the severity, duration, or
financial consequences of these perhaps inevitable failures. As a result,
management expects that the Company, under this worst-case scenario, could
suffer the following consequences: (a) a significant number of operational
inconveniences and inefficiencies for the Company and its clients that may
divert management's time and attention and financial and human resources from
its ordinary business activities; and (b) a small number of serious system
failures related to older versions of the Company's PHARMASYST(TM) and
PHARM2(TM) products that may require significant efforts by the Company and/or
its customers to prevent or alleviate material business disruptions.
CONTINGENCY PLANS. The Company is currently developing contingency
plans to be implemented as part of its effort to identify and correct Y2K
Problems that may affect its internal systems. The Company currently expects to
complete its contingency plans during early 1999. Depending on the systems
affected, these plans could include accelerated replacement of affected third
party equipment or software (the timing of which would occur in the third
quarter of 1999), the hiring of additional personnel and/or increased work hours
for Company personnel to correct, on an accelerated schedule, any Y2K Problems
that arise with the earlier versions of PHARMASYST(TM) and PHARM2(TM) software
sold to customers, and/or similar approaches to any Y2K Problems that may occur.
If the Company is required to implement any of these contingency plans, it
could, but is not currently expected to, have a material adverse effect on the
Company's financial condition and results of operations.
Based on the Company's current analysis of the Y2K Problem, as described
above, the Company does not believe that the Y2K Problem will have a material
adverse effect on the Company's business or results of operations.
DISCLAIMER. The discussion of the Company's efforts, and management's
expectations, relating to Y2K compliance are forward-looking statements. The
Company's ability to achieve Y2K compliance and the level of incremental costs
associated therewith, could be adversely impacted by, among other things, the
resources needed to bring older versions of the Company's PHARMASYST(TM) and
PHARM2(TM) software into Y2K compliance, the third-party supplier's ability to
modify its proprietary software, and unanticipated problems identified in the
ongoing compliance review.
LIQUIDITY AND CAPITAL RESOURCES
Company working capital decreased from $5.8 million to $2.7 million
during the nine-month 1998 period, ended September 30, 1998. The Company had
$2.1 million of cash at September 30, 1998, down from $9.1 million at December
31, 1997. The decrease in cash during the nine-month period ended September 30,
1998 resulted from the use of cash in operations of $14.5 million, the use of
cash in investing activities of $2.6 million, and the effects of exchange rates
of $0.2 million. These uses of cash were partly offset by cash provided from
financing activities of $10.2 million.
In 1998 cash used in operations has been affected primarily by the net
loss of $12.5 million, an increase of $3.1 million in accounts receivable, an
increase in other current and non-current assets of $1.7 million, and a
reduction of $0.5 million in accounts payable and accrued expenses. These uses
of cash have been partially offset by amortization and depreciation of $3.4
million, included in the aforementioned net loss amount.
Investing activities in 1998 have been comprised primarily of the
acquisition of assets related to the Flowstream product of $2.1 million, and
additions to plant and equipment of $0.5 million.
Cash from financing activities for the nine-month 1998 period have been
primarily due to the receipt in January 1998 of $9.6 million related to the
second installment of an investment by the Company's Series A Preferred
Stockholders.
During the quarter ended September 30, 1998, the Company determined that
it needed to secure additional sources of capital to fund its operations. On
November 10, 1998, at a Special Meeting of Shareholders, the sale and issuance
of up to 6,666,666 shares of Class A Common Stock was approved, among other
items, by the shareholders of the Company. The Company received net proceeds
from this sale of $18.8 million on November 13, 1998. The Company currently
believes that cash to be generated by operations and existing capital resources
will be sufficient to fund its operations through the end of 1999. However, in
this respect, the Company is relying on its leading products, BASE10(TM)ME and
BASE10(TM)FS to stimulate new orders. Neither the additional development of the
Company's MES products nor the consequential generation of cash can be assured,
either in time or amount, nor is there any assurance that such amounts will be
sufficient for the Company's needs. In the absence of such orders or the promise
thereof, neither of which can be assured, as well as in connection with its
expected capital needs for the year 2000 and beyond, the Company may elect to
seek additional sources of capital and may also elect to reduce the pace of its
development of its products and/or establish other cost reduction measures,
which could adversely impact the Company. In the event the Company elects to
seek additional capital there can be no assurance that such funds or capital
would be available on the terms or in the amounts needed.*
*FORWARD LOOKING STATEMENT
The foregoing contains forward looking information within the meaning of
The Private Securities Litigation Reform Act of 1995. Such forward looking
statements and paragraphs may be identified by an "asterisk" ("*") or by such
forward looking terminology as "may", "will", "believe", "anticipate", or
similar words or variations thereof. Such forward looking statements involve
certain risks and uncertainties including the particular factors described more
fully above in the MD&A section and throughout this report and in each case
actual results may differ materially from such forward looking statements.
Successful marketing of BASE10(TM)ME and BASE10(TM)FS and their future
contribution to Company revenues depends heavily on, among other things,
successful early completion of current test efforts and the necessary
corrections to the software permitting timely delivery to customers, none of
which can be assured. Other important factors that the Company believes may
cause actual results to differ materially from such forward looking statements
are discussed in the "Risk Factors" sections in the Company's Registration
Statement on Form S-3 (File No. 333-46095) as well as current and previous
filings with the Securities and Exchange Commission. In assessing forward
looking statements contained herein, readers are urged to read carefully those
statements and other filings with the Securities and Exchange Commission. The
Company does not undertake to publicly update or revise its forward looking
statements even if experience or future changes make it clear that any projected
results or events (expressed or implied) will not be realized.
<PAGE>
PART II. OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES
On November 10, 1998, the Company held a Special Meeting of
Shareholders. At the meeting, the following were approved by the
shareholders: (1) an amendment to the Certificate of Incorporation to
increase the authorized Class A Common Stock from 40 million to 60
million shares, (2) the sale and issuance of Series B Convertible
Preferred Stock (subject to the execution of definitive agreements), (3)
the issuance of Class A Common Stock Purchase Warrants to the Series A
Preferred Stockholders that would receive Series B Convertible Preferred
Stock, (4) the modification of the outstanding $10 million 9.01%
Convertible Subordinated Debenture, (5) the sale and issuance of up to
6,666,666 shares of Class A Common Stock at a purchase price of $3.00
per share, and Warrants to purchase up to 1,000,000 shares of Class A
Common Stock, (6) the amendment to the 1998 Directors' Stock Option
Plan, and (7) the amendment to the 1998 Stock Option and Stock Award
Plan. On July 24, 1998 the Company filed three Registration Statements
on Form S-8 with the Securities and Exchange Commission to register the
equity plans referred to in items (6) and (7) above.
The sale and issuance of Series B Convertible Preferred Stock ("Series B
Shares") would be to the Series A Convertible Preferred Stockholders in
the form of an even exchange for Series A Convertible Preferred Stock
("Series A Shares"). The terms of the Series B Shares are similar to the
Series A Shares, except that: (a) the Series B Shares would have a
conversion price of $4.00, whereas the conversion price of the Series A
Shares is equal to the lesser of ( i ) $16.25 or (ii) the Weighted
Average Price (as defined) of the Class A Common Stock prior to the
conversion date; and (b) the Series B Shares, as a result of the fixed
conversion price of $4.00, would not provide the holder with the option
to receive a subordinated 8% promissory note, as the Series A Shares
provides.
The issuance of Class A Common Stock Purchase Warrants to the Series A
Preferred Stockholders that would receive Series B Convertible Preferred
Stock provides for the issuance of 80,000 Class A Common Stock Purchase
Warrants for each $1 million of principal amount of the Series A Shares
outstanding on November 10, 1998 in addition to certain other Series A
Shares which were converted at $4.00 per share between September 1, 1998
and November 10, 1998. These purchase warrants are four-year warrants
exercisable at $3.00, and provide for mandatory exercise upon the
occurrence of certain events.
The modification of the $10 million 9.01% Convertible Subordinated
Debenture would decrease the conversion price at which the debenture is
convertible into shares of Class A Common Stock from $12.50 to $4.00.
SALE AND ISSUANCE OF $20 MILLION CLASS A COMMON STOCK AND WARRANTS
On November 13, 1998, in order to provide additional equity to the
Company, the Company sold 6,666,666 shares of Class A Common Stock at a
purchase price of $3.00 per share for aggregate proceeds of $20,000,000
and net proceeds of $18.8 million, net of commissions and expenses. For
each $1 million of Class A Common Stock purchased, the purchaser
received seven-year warrants to purchase 50,000 shares of Class A Common
Stock, exercisable at $3.00 per share; a total of 1,000,000 warrants
were, therefore, issued to the purchaser. The placement agent also
received warrants to purchase up to 250,000 shares of Class A Common
Stock.
CONVERSION OF CONVERTIBLE TERM DEBENTURES TO CLASS A COMMON STOCK
During the three months ended September 30, 1998, $1,700,000 of
Convertible Term Debentures were converted to 674,856 shares of Class A
Common Stock. At September 30, 1998, after the effect of these
conversions, the Company had $10,000,000 of Convertible Term Debentures
on its balance sheet.
CONVERSION OF SERIES A CONVERTIBLE PREFERRED STOCK TO
CLASS A COMMON STOCK
During the three months ended September 30, 1998, 1,574 shares of Series
A Convertible Preferred Stock were converted to 312,524 shares of Class
A Common Stock.
As of November 13, 1998, an additional 3,600 shares of Series A
Convertible Preferred Stock were converted to 1,500,338 shares of Class
A Common Stock, during the fourth quarter of 1998.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On November 10, 1998, the Company held a Special Meeting of
Shareholders. At the meeting, the following were approved by the
shareholders: (1) an amendment to the Certificate of Incorporation to
increase the authorized Class A Common Stock from 40 million to 60
million shares, (2) the sale and issuance of Series B Convertible
Preferred Stock (subject to the execution of definitive agreements), (3)
the issuance of Class A Common Stock Purchase Warrants to the Series A
Preferred Stockholders that would receive Series B Convertible Preferred
Stock, (4) the modification of the outstanding $10 million 9.01%
Convertible Subordinated Debenture, (5) the sale and issuance of up to
6,666,666 shares of Class A Common Stock at a purchase price of $3.00
per share, and Warrants to purchase up to 1,000,000 shares of Class A
Common Stock, (6) the amendment to the 1998 Directors' Stock Option
Plan, and (7) the amendment to the 1998 Stock Option and Stock Award
Plan. On July 24, 1998 the Company filed three Registration Statements
on Form S-8 with the Securities and Exchange Commission to register the
equity plans referred to in items (6) and (7) above.
The sale and issuance of Series B Convertible Preferred Stock ("Series B
Shares") would be to the Series A Convertible Preferred Stockholders in
the form of an even exchange for Series A Convertible Preferred Stock
("Series A Shares"). The terms of the Series B Shares are similar to the
Series A Shares, except that: (a) the Series B Shares would have a
conversion price of $4.00, whereas the conversion price of the Series A
Shares is equal to the lesser of ( i ) $16.25 or (ii) the Weighted
Average Price (as defined) of the Class A Common Stock prior to the
conversion date; and (b) the Series B Shares, as a result of the fixed
conversion price of $4.00, would not provide the holder with the option
to receive a subordinated 8% promissory note, as the Series A Shares
provides.
The issuance of Class A Common Stock Purchase Warrants to the Series A
Preferred Stockholders that would receive Series B Convertible Preferred
Stock provides for the issuance of 80,000 Class A Common Stock Purchase
Warrants for each $1 million of principal amount of the Series A Shares
outstanding on November 10, 1998 in addition to certain other Series A
Shares which were converted at $4.00 per share between September 1, 1998
and November 10, 1998. These purchase warrants are four-year warrants
exercisable at $3.00, and provide for mandatory exercise upon the
occurrence of certain events.
The modification of the $10 million 9.01% Convertible Subordinated
Debenture would decrease the conversion price at which the debenture is
convertible into shares of Class A Common Stock from $12.50 to $4.00.
In order to provide additional equity to the Company, the Company has
agreed to sell up to 6,666,666 shares of Class A Common Stock at a
purchase price of $3.00 per share for aggregate proceeds of up to
$20,000,000. For each $1 million of Class A Common Stock purchased, the
purchaser will receive seven-year warrants to purchase 50,000 shares of
Class A Common Stock, exercisable at $3.00 per share. (See "Sale and
Issuance of $20 Million Class A Common Stock and Warrants" under "Item
2: Changes in Securities").
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - (27) Financial Data Schedule (Edgar filing only.)
(b) Reports on Form 8-K - None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: November 16, 1998
BASE TEN SYSTEMS, INC.
(Registrant)
By: /S/ THOMAS E. GARDNER
-------------------------------------
Thomas E. Gardner
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
By: /S/ WILLIAM F. HACKETT
------------------------------------
William F. Hackett
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: November 16, 1998
BASE TEN SYSTEMS, INC.
(Registrant)
By: ------------------------------------
Thomas E. Gardner
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
By:-------------------------------------
William F. Hackett
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Appendix A to Item 601(c) of Regulation S-K
Commercial and Industrial Companies
Article 5 of Regulation S-X
(In thousands except per share data)
</LEGEND>
<CIK> 0000010242
<NAME> Base Ten
<MULTIPLIER> 1
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<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jul-01-1998
<PERIOD-END> Sep-30-1998
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<SECURITIES> 125,000
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18,000
0
<COMMON> 10,554,000
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