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 March 31, 1999 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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 586-7010
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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.
Title of Class Outstanding at April 30, 1999
-------------- -----------------------------
Class A Common Stock, $1.00 par value 21,204,514
Class B Common Stock, $1.00 par value 71,144
<PAGE>
Base Ten Systems, Inc.
And Subsidiaries
Index
<TABLE>
<CAPTION>
Part I. Financial Information Page
- ------- --------------------- ----
<S> <C>
Item 1: Financial Statements
Consolidated Balance Sheets - March 31, 1999 (unaudited)
and December 31, 1998 (audited)......................................................... 1
Consolidated Statements of Operations -- Three months
ended March 31, 1999 and 1998 (unaudited)............................................... 2
Consolidated Statements of Shareholders' Equity - Three
months ended March 31, 1999 (unaudited)................................................. 3
Consolidated Statements of Cash Flows -- Three months ended
March 31, 1999 and 1998 (unaudited)..................................................... 4
Notes to Consolidated Financial Statements.............................................. 5
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................... 12
Item 3: Quantitative and Qualitative Disclosures About Market Risk ..................... 20
Part II. Other Information
- -------- -----------------
Item 2: Changes in Securities and Use of Proceeds.................................. 21
Item 6: Exhibits and Reports on Form 8-K........................................... 22
</TABLE>
<PAGE>
Item 1. Financial Statements
<TABLE>
<CAPTION>
Base Ten Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except par value)
Assets
March 31, December 31,
1999 1998
(unaudited) (audited)
--------------- -------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................................. $13,283 $17,437
Accounts receivable, net.................................................... 2,753 2,372
Other current assets........................................................ 1,311 639
--------------- -------------------
Total Current Assets.................................................. 17,347 20,448
--------------- -------------------
Property, plant and equipment, net............................................. 4,876 5,026
Note receivable................................................................ 1,975 1,975
Other assets................................................................... 5,394 6,372
--------------- -------------------
Total Assets $29,592 $33,821
=============== ===================
Liabilities, Redeemable Convertible Preferred Stock, and Shareholders' Equity (Deficiency)
Current Liabilities:
Accounts payable............................................................ $ 1,263 $ 984
Accrued expenses............................................................ 2,452 3,152
Deferred revenue............................................................ 1,348 756
Current portion of financing obligation..................................... 92 74
--------------- ------------------
Total Current Liabilities............................................. 5,155 4,966
--------------- ------------------
Long-Term Liabilities:
Long-term debt.............................................................. - 10,000
Financing obligation........................................................ 3,307 3,341
Other long-term liabilities................................................. 223 228
--------------- ------------------
Total Long-Term Liabilities........................................... 3,530 13,569
--------------- ------------------
Commitments and Contingencies
Redeemable Convertible Preferred
Stock (994,202 total shares of preferred stock authorized):
Series A Preferred Stock, $1.00 par value, issued and outstanding 14,942
shares at December 31, 1998; aggregate liquidation value of $14,942
at December 31, 1998..................................................... - 12,914
Series B Preferred Stock, $1.00 par value, issued and outstanding 15,203
shares at March 31, 1999; aggregate liquidation value of $15,203
at March 31, 1999........................................................ 12,354 -
--------------- ------------------
Total Redeemable Convertible Preferred Stock.......................... 12,354 12,914
--------------- ------------------
Shareholders' Equity (Deficiency):
Class A Common Stock, $1.00 par value, 60,000,000 shares authorized;
issued and outstanding 21,204,514 shares at March 31, 1999 and
18,659,748 at December 31, 1998.......................................... 21,205 18,660
Class B Common Stock, $1.00 par value, 2,000,000 shares authorized;
issued and outstanding 71,144 shares at March 31, 1999 and 71,410
shares at December 31, 1998.............................................. 71 71
Additional paid-in capital.................................................. 64,136 52,885
Accumulated Deficit......................................................... (76,325) (68,767)
--------------- ------------------
9,087 2,849
Accumulated other comprehensive income (loss)............................... (253) (196)
Treasury Stock, 100,000 Class A Common Shares, at cost...................... (281) (281)
--------------- ------------------
Total Shareholders' Equity (Deficiency)............................... 8,553 2,372
--------------- ------------------
Total Liabilities, Redeemable Convertible Preferred Stock, and
Shareholders' Equity (Deficiency)..................................... $ 29,592 $ 33,821
=============== ==================
</TABLE>
See Notes to the Consolidated Financial Statements
1
<PAGE>
<TABLE>
<CAPTION>
Base Ten Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
(dollars in thousands, except per share data)
Three months ended Three months ended
March 31, 1999 March 31, 1998
--------------------- ----------------------
<S> <C> <C>
License and related revenue................................ $ 616 $ 370
Services and related revenue............................... 1,053 540
--------------------- ----------------------
1,669 910
Cost of revenues........................................... 1,495 2,407
Research and development................................... 459 140
Selling and marketing...................................... 1,418 1,165
General and administrative................................. 2,196 1,354
Non-cash debt conversion charge............................ 3,506 --
--------------------- ----------------------
9,074 5,066
--------------------- ----------------------
Loss before other income (expense) and income tax benefit.. (7,405) (4,156)
--------------------- ----------------------
Other income (expense), net................................ (54) (239)
--------------------- ----------------------
Loss before income tax benefit............................. (7,459) (4,395)
--------------------- ----------------------
Income tax benefit......................................... -- --
--------------------- ----------------------
Net loss .................................................. (7,459) (4,395)
--------------------- ----------------------
Less: Dividends on Redeemable Convertible Preferred Stock (262) (475)
Accretion on Redeemable Convertible Preferred Stock (282) --
Credit on Exchange of Redeemable Convertible Preferred
Stock.............................................. 445 --
--------------------- ----------------------
Net loss available for common shareholders................. $ (7,558) $ (4,870)
===================== ======================
Basic and diluted net loss per share....................... $ (0.39) $ (0.58)
--------------------- ----------------------
Weighted average common shares outstanding - basic and
diluted................................................. 19,525,000 8,340,000
--------------------- ----------------------
</TABLE>
See Notes to the Consolidated Financial Statements
2
<PAGE>
<TABLE>
<CAPTION>
Base Ten Systems, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity (Deficiency)
(unaudited)
(dollars in thousands)
Class A Class B Additional
Common Stock Common Stock Paid-In
Shares Amount Shares Amount Capital
========================== ============ ============ ============ ============ ============
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1998 ........ 18,659,748 $18,660 71,410 $71 $ 52,885
========================== ========== ======= ======= === ========
Conversions:
Common B to
Common A ............. 399 -- (266) -- --
Preferred A to
Common A ............. 28,695 29 -- -- (29)
Debenture to
Common A ............. 2,500,000 2,500 -- -- 10,609
Exercise of options ...... 250 -- -- -- --
Issuance of
Common Stock:
Private placement .... -- -- -- -- --
Interest payments .... -- -- -- -- --
Employee stock
purchase plan ........ 15,445 16 -- -- 12
Dividends on Redeemable
Preferred Stock .......... -- -- -- -- --
Accretion on Redeemable
Preferred Stock .......... -- -- -- -- --
Credit on Exchange of
Redeemable Convertible
Preferred Stock ......... -- -- -- -- 659
Treasury stock
purchase ................. -- -- -- -- --
Comprehensive
Income (Loss):
Net loss ............. -- -- -- -- --
Foreign currency
translation .......... -- -- -- -- --
Unrealized gain on
securities available
for sale ............. -- -- -- -- --
Total Comprehensive
Income (Loss) ............ -- -- -- -- --
- -------------------------- ---------- ------- ------- --- --------
Balance at
March 31, 1999 .......... 21,204,537 $21,205 71,144 $71 $ 64,136
========================== ========== ======= ======= === ========
<PAGE>
<CAPTION>
Accumulated
Other Treasury Stock Total
Accumulated Comprehensive Shareholders'
Deficit Income (Loss) Shares Amount Equity
---------- ------------- ------ ------ -------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1998 ........ $(68,767) $(196) (100,000) $(281) $ 2,372
========================== ======== ===== ======== ===== ========
Conversions:
Common B to
Common A ............. -- -- -- -- --
Preferred A to
Common A ............. -- -- -- -- --
Debenture to
Common A ............. -- -- -- -- 15,223
Exercise of options ...... -- -- -- -- --
Issuance of
Common Stock:
Private placement .... -- -- -- -- --
Interest payments .... -- -- -- -- --
Employee stock
purchase plan ........ -- -- -- -- 28
Dividends on Redeemable
Preferred Stock .......... (262) -- -- -- (262)
Accretion on Redeemable
Preferred Stock .......... (282) -- -- -- (282)
Credit on Exchange of
Redeemable Convertible
Preferred Stock ......... 445 -- -- -- 1,104
Treasury stock
purchase ................. -- -- -- -- --
Comprehensive
Income (Loss):
Net loss ............. (7,459) -- -- -- (7,459)
Foreign currency
translation .......... -- (48) -- -- (48)
Unrealized gain on
securities available
for sale ............. -- (9) -- -- (9)
Total Comprehensive
Income (Loss) ............ -- -- -- -- (7,516)
- -------------------------- -------- ----- -------- ----- --------
Balance at
March 31, 1999 .......... $(76,325) $(253) (100,000) $(281) $ 8,553
========================== ======== ===== ======== ===== ========
</TABLE>
See Notes to the Consolidated Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
Base Ten Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
(dollars in thousands)
Three Months Three Months
Ended Ended
March 31, 1999 March 31, 1998
============================================================================= ==================== =====================
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (7,459) $ (4,395)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Depreciation and amortization 698 950
Non-cash debt conversion charge 3,506 --
Changes in operating assets and liabilities:
Accounts receivable (381) (867)
Other current assets (686) (295)
Accounts payable and accrued expenses 171 (961)
- ----------------------------------------------------------------------------- -------------------- ---------------------
Net Cash Used in Operations (4,151) (5,568)
============================================================================= ==================== =====================
Cash Flows from Investing Activities:
Additions to property, plant and equipment (29) (258)
Additions to capitalized software costs and other assets -- (542)
Purchase of assets related to FlowStream product -- (2,068)
- ----------------------------------------------------------------------------- -------------------- ---------------------
Net Cash Used in Investing Activities (29) (2,868)
============================================================================= ==================== =====================
Cash Flows from Financing Activities:
Repayment of amounts borrowed (16) (31)
Proceeds from issuance of redeemable preferred stock -- 9,625
Proceeds from issuance of common stock 24 368
- ----------------------------------------------------------------------------- -------------------- ---------------------
Net Cash Provided from Financing Activities 8 9,962
============================================================================= ==================== =====================
Effect of Exchange Rate Changes on Cash 18 (11)
============================================================================= ==================== =====================
- ----------------------------------------------------------------------------- -------------------- ---------------------
Net (Decrease)/Increase In Cash (4,154) 1,515
Cash, beginning of period 17,437 9,118
- ----------------------------------------------------------------------------- -------------------- ---------------------
Cash, end of period $ 13,283 $ 10,633
============================================================================= ==================== =====================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest $ 572 $ 579
</TABLE>
See Notes to the Consolidated Financial Statements
4
<PAGE>
Base Ten Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Three Months Ended March 31, 1999
(Unaudited)
A. Basis of Presentation and Liquidity
The Company's financial statements have been prepared on the basis that it
will continue as a going concern. The Company has incurred significant
operating losses and negative cash flows in recent years. Also, at December
31, 1998 the Company was below the $4 million minimum net tangible assets,
as defined, required for its current listing on the NASDAQ National Market
System. In March 1999, the Company's shareholders' equity was increased by
approximately $9.6 million through the conversion of its $10 million
convertible debenture into common stock. As a result of this conversion, the
Company's net tangible assets rose above the $4.0 million minimum to $7.4
million at March 31, 1999. Coincident with that debt conversion, the
Company's Series A Redeemable Convertible Preferred Stock was exchanged for
Series B Redeemable Convertible Preferred Stock. These Preferred Stocks have
certain Redemption Events, which if such events occurred, would provide the
holder with the right to require the Company to purchase their shares for
cash which would adversely affect the Company. (See Note E to the
Consolidated Financial Statements.) Accordingly, where these rights exist
such redeemable securities are categorized outside of shareholders' equity
and, thus, may not qualify as equity for the purposes of the NASDAQ minimum
net tangible asset requirement. Also, security holders may have other
rights/claims in connection with the March 1999 transactions described
above.
To further increase the Company's net tangible assets and in order to help
further ensure the Company's compliance with NASDAQ listing requirements,
management is in the process of negotiating with all participants in the
March 1999 Preferred Stock exchange to obtain waivers of any redemption or
rescission rights. These waivers, if obtained, would eliminate cash
redemption rights where the redemption event is beyond the control of the
Company. This would qualify all related securities for classification in
permanent stockholders' equity and increase the Company's qualifying net
tangible assets. If such waivers are obtained, then management believes that
the Company's current liquidity would be sufficient to meet its cash needs
for its existing business through fiscal 1999. However, there can be no
assurance that management's efforts in this regard will be successful.
If management is not successful in obtaining such waivers, and it continues
to incur operating losses it could fall below the minimum net asset
requirement needed to qualify for ongoing listing on NASDAQ. Management's
plans in this regard include, among other things, (i) attempting to improve
operating cash flow through increased license sales and service revenue, and
(ii) increasing the level of anticipated streamlining of its selling,
administration and development functions. However there is no assurance that
such plans, if implemented, will be sufficient.
Also, the Company is considering certain significant acquisitions which
depending on net liabilities assumed, if any, and on the success of cost
reduction efforts to bring the target's operations to net positive cash
flow, may require additional funding. (See Note C to the Consolidated
Financial Statements.) However, there can be no assurance that such
acquisitions will occur, or whether additional funds required, if any, would
be available to Base Ten.
If current cash and working capital reduced by cash used in operations in
1999 is not sufficient to satisfy the Company's liquidity and minimum net
tangible asset requirements, the Company will seek to obtain additional
equity financing. Additional funding may not be available when needed or on
terms acceptable to the Company. If the Company were required to raise
additional financing for the matters described above and/or to continue to
fund expansion, develop and enhance products and service, or otherwise
respond to competitive pressures, there is no assurance that adequate funds
will be available or that they will be available on terms acceptable to the
Company. Such a limitation could have a material adverse effect on the
Company's business; financial condition or operations and the financial
statements do not include any adjustment that could result therefrom.
<PAGE>
B. Description of Business
Base Ten Systems, Inc. ("Base Ten" or the "Company") develops,
manufactures and markets computer software systems that assist
manufacturers in industries regulated by the Food and Drug Administration
(FDA). Our software systems aid our customers in complying with FDA
guidelines and improve our customer's overall productivity and include
BASE10(TM)ME and BASE10(TM)FS, which are "management execution systems."
BASE10(TM)ME uses Windows NT operating systems and BASE10(TM)FS uses HP-UX
and Digital VAX/VMS operating systems. The Company also offers
BASE10(TM)CS, which is a "clinical supplies management system." This
software system assists manufacturers in production during various phases
of clinical trials. BASE10(TM)CS uses Windows NT operating systems. The
Company's software systems primarily target three FDA regulated
industries: (1) human drugs, biologics, and medical devices, (2)
5
<PAGE>
chemicals, and (3) food and cosmetics. Base Ten designs its software
systems to help customers comply with FDA regulations, including current
Good Manufacturing Practice (cGMP), which involves inventory, dispensing,
production and packaging.
The Company also develops and markets other medical devices, including
uPACs(TM) and Prenval(TM). uPACS(TM) is an ultrasound picture archiving
communications systems that digitizes, records and stores images on CD-ROM
as an alternative to film and video storage. In 1997 we formed a limited
liability company (LLC) with an individual investor who currently is a
principal stockholder of Base Ten. The Company contributed uPACs(TM)
technology to the LLC and the investor contributed $3 million to the LLC
to fund required further development of the technology. Base Ten has a 9%
interest in the LLC and the investor has a 91% interest in the LLC. The
PRENVAL(TM) software program analyzes results of blood tests for prenatal
detection of certain birth defects. The Company receives revenue from
PRENVAL(TM) from a license to Johnson & Johnson, who markets the product
in Europe under the name Prenata(TM).
C. 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 December 31, 1998, as amended. The results of
operations for the three months ended March 31, 1999 are not
necessarily indicative of the operating results for the full
year.
2. Principles of Consolidation - The consolidated financial
statements include the accounts of Base Ten Systems, Inc. and
its wholly owned subsidiaries. All significant inter-company
accounts, transactions and profits have been eliminated.
3. Risks and Uncertainties - The Company operates in the software
industry, which is highly competitive and rapidly changing. The
Company has had a history of significant losses from operations
and is subject to certain risks, including all of the risks
inherent in a technology business, including but not limited to:
potential for significant technological changes in the industry
or customer requirements, potential for emergence of competitive
products with new capabilities or technologies, ability to
manage future growth, ability to attract and retain qualified
employees, dependence on key personnel, limited senior
management resources, success of its research and development,
protection of intellectual property rights, and potentially long
sales and implementation cycles. The Company is also subject to
the risk associated with ongoing satisfaction of NASDAQ
requirements for continued listing.
The preparation of financial statements in accordance with
generally accepted accounting standards requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Significant
estimates include the allowance for doubtful accounts
receivable, the total costs to be incurred under software
license agreements requiring significant customizations or
modifications and the useful lives of capitalized computer
software costs. Actual costs and results could differ from these
estimates.
4. Net Loss Per Share - The Company calculates earnings per share
in accordance with the provisions of Statement of Financial
Accounting Standard No. 128, "Earnings Per Share" ("FAS 128").
FAS 128 requires the Company to present Basic Earnings Per Share
which excludes dilution and Diluted Earnings Per Share which
includes potential dilution. The following is a reconciliation
of the numerators and denominators used to calculate loss per
share in the Consolidated Statements of Operations (in
thousands, except share and per share data):
6
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
March 31, 1999 March 31, 1998
===============================================================================================
<S> <C> <C>
Loss per common share-basic:
Net loss $ (7,459) $ (4,395)
Less: Dividends on Series A Preferred Stock (262) (475)
Accretion on Series A Preferred Stock (282) --
Credit on exchange of Redeemable
Convertible Preferred Stock 445 --
- -----------------------------------------------------------------------------------------------
Net loss to common shareholders (numerator) $ (7,558) $ (4,870)
===============================================================================================
Weighted average shares - basic (denominator) 19,525,000 8,340,000
- -----------------------------------------------------------------------------------------------
Net loss per common share-basic $ (0.39) $ (0.58)
===============================================================================================
Loss per common share-fully diluted:
Net loss $ (7,459) $ (4,395)
Less: Dividends on Series A Preferred Stock (262) (475)
Accretion on Series A Preferred Stock (282) --
Credit on exchange of Redeemable
Convertible Preferred Stock 445 --
- -----------------------------------------------------------------------------------------------
Net loss to common shareholders (numerator) $ (7,558) $ (4,870)
===============================================================================================
Weighted average shares 19,525,000 8,340,000
Effect of dilutive options / warrants -- --
- -----------------------------------------------------------------------------------------------
Weighted average shares-fully diluted (denominator) 19,525,000 8,340,000
- -----------------------------------------------------------------------------------------------
Net loss per common share-diluted $ (0.39) $ (0.58)
- -----------------------------------------------------------------------------------------------
</TABLE>
Stock options, warrants and rights would have an anti-dilutive
effect on earnings per share for the periods ended March 31,
1999 and 1998 and, therefore, were not included in the
calculation of fully diluted earnings per share.
5. Investments - The Company accounts for its investments using
Statement of Financial Accounting Standard No. 115, "Accounting
for Certain Investments in Debt and Equity Securities"("FAS
115"). This standard requires that certain debt and equity
securities be adjusted to market value at the end of each
accounting period. Unrealized market value gains and losses are
charged to earnings if the securities are traded for short-term
profit. Otherwise, such unrealized gains and losses are charged
or credited to a separate component of shareholders' equity.
Management determines the proper classifications of investments
in obligations with fixed maturities and marketable equity
securities at the time of purchase and reevaluates such
designations as of each balance sheet date. At March 31, 1999
and December 31, 1998, all securities covered by FAS 115 were
designated as available for sale. Accordingly, these securities
are stated at fair value, with unrealized gains and losses
reported in a separate component of shareholders' equity.
Securities available for sale at March 31, 1999 and December 31,
1998, consisted of common stock with a cost basis of $50,000 and
are included in other current assets. Differences between cost
and market of $45,000 and $54,000 were included as a component
of "accumulated other comprehensive income (loss)" in
shareholders' equity, as of March 31, 1999 and December 31,
1998, respectively.
6. Reclassifications - Certain reclassifications have been made to
prior year financial statements to conform to the current year
presentation.
7
<PAGE>
D. Acquisitions
Almedica Technology Group Acquisition
On March 16, 1999, the Company's Board of Directors agreed to proceed
with negotiations for the acquisition of Almedica Technology Group, Inc.
("Almedica"), a wholly owned subsidiary of Almedica International, Inc.
in a stock transaction. Almedica develops clinical label and materials
management software for the pharmaceutical industry essential to the
management of clinical trials. The acquisition, which is subject to the
negotiation of final terms and the execution of definitive agreements,
is currently expected to close before the end of May 1999.
Select Software Tools Possible Acquisition
On March 16, 1999, the Company's Board of Directors approved the
commencement of preliminary discussions which could lead to an
acquisition of Select Software Tools, plc (NASDAQ: SLCTY) ("Select") in
a stock transaction. The acquisition is subject to the negotiation of
final terms, due diligence and execution of definitive agreements, and
the approval of Select security holders. On March 26, 1999 and April 21,
1999, the Company loaned approximately $700,000 and $450,000,
respectively, to Select under a promissory note.
Select advised the Company that it took certain restructuring actions in
the second half of 1998 and early 1999 in an effort to significantly
reduce its expense base. Select has informed the Company that they have
identified certain possible additional cost reductions which are
intended to bring Select to net positive cash flow shortly after the
closing of any potential transaction with the Company. If the Select
acquisition occurs, depending on net liabilities of Select assumed by
the Company at the date of acquisition, if any, and on the success of
these cost reduction efforts, in bringing Select to net positive
cashflow, the Company may require additional funding in 1999. However,
no assurance can be given that the acquisition will occur and, if it
does, whether additional required funds would be available to the
Company if needed.
E. Redeemable Convertible Preferred Stock and Convertible Debt
On December 4, 1997, the Company entered into a securities purchase
agreement to sell 19,000 of Series A, $1.00 par value, Convertible
Preferred Stock ("Series A Preferred Stock") and common stock warrants
for gross proceeds of $19,000,000. The closing of the Series A Preferred
Stock and warrants occurred in two tranches. On December 9, 1997, the
Company issued 9,375 shares of Series A Preferred Stock and 375,000
warrants. An additional 346,000 warrants were issued to consultants
valued at approximately $1,011,000. The transaction resulted in net
proceeds of $6,984,000, net of offering costs of $1,380,000. The Company
allocated the net proceeds of the first tranche of Series A Preferred
Stock and the warrants based upon their relative fair values resulting
in $6,155,000 assigned to the Series A Preferred Stock and $829,000 to
the warrants. On December 31, 1997, 9,625 shares of Series A Preferred
Stock and 385,000 warrants were issued to the holders of the Series A
Preferred Stock, net of cash offering costs of approximately $245,000,
resulting in net proceeds of $9,380,000. The Company allocated the net
proceeds of the second tranche of Series A Preferred Stock and the
warrants based upon their relative fair values resulting in $8,529,000
assigned to the Series A Preferred Stock and $851,000 to the warrants.
Such proceeds were received on January 2, 1998, and were recorded as
subscriptions receivable at December 31, 1997.
During 1998, 5,798 shares of Series A Preferred Stock were converted
into 1,917,806 shares of Class A Common Stock and 1,740 shares of Series
A Preferred Stock were issued as dividends resulting in 14,942 shares of
Series A Preferred Stock outstanding at December 31, 1998.
On March 5, 1999, the outstanding Series A Preferred Stock and warrants
were exchanged for Series B Preferred Stock. As a result, approximately
15,203 shares of Series B Preferred Stock, with a principal amount of
approximately $15,203,000 were exchanged for the outstanding shares of
Series A Preferred Stock. In addition, 632,000 new Warrants were issued
to Series B Preferred Stockholders, and 720,000 Warrants were issued to
replace certain original Warrants issued in December 1997. The Series B
Preferred Stock and Warrants have been recorded at their estimated fair
value of $13,013,000. The difference between this estimated fair value
and the carrying value of the Series A Preferred Stock has been recorded
as a credit to net loss available to common shareholders.
Also on March 5, 1999, the Company's $10 million Convertible
Subordinated Debenture was converted at the reduced conversion price of
$4.00 per share. The shareholders had previously approved a proposal to
authorize the Company to decrease this conversion price from $12.50 to
$4.00 per share of Class A Common Stock. The market value of the
additional conversion shares issued as a result of the reduced
conversion price was approximately $3,506,000.
8
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The terms of the Series B Preferred Stock are similar to the Series A
Preferred Stock, except that: (a) the Series B Preferred Stock have a
conversion price of that number of shares determined by dividing the
Mandatory Redemption Price, as defined in the terms of the Series B
Preferred Stock, by $4.00, whereas the conversion price of the Series A
Preferred Stock was equal to the Mandatory Redemption Price divided by
the lesser of (i) $16.25 or (ii) the Weighted Volume Average Price (as
defined) of the Class A Common Stock prior to the conversion date
limited to 3,040,000 shares; (b) the Series B Preferred Stock does not
provide the holder with the option to receive a subordinated 8%
promissory note because of the elimination of the 3,040,000 share
limitation; and (c) the Series B Preferred Stock does not provide for a
dividend payment based on the market price of the Class A Common Stock.
As a result of the exchange of Series A Preferred Stock for Series B
Preferred Stock, preferred stock dividends are no longer required to be
paid by the Company.
The Series B Preferred Stock is convertible at any time or from time to
time into Class A Common Stock at a conversion price of $4.00.
The Series B Preferred Stock matures on December 15, 2000. On the
maturity date, the Company must redeem the outstanding preferred stock
at its Mandatory Redemption Price, which is the sum of purchase price,
accrued but unpaid dividends and other contingent payments as provided
pursuant to the terms of the preferred stock. The portion of the
Mandatory Redemption Price constituting such other contingent payments
is payable in cash whereas the purchase price and accrued but unpaid
dividends are payable in cash or common stock at the option of the
Company. Accordingly, the Company is accreting the carrying value of the
preferred stock to the purchase price and recognizing the accretion
charges to retained earnings (accumulated deficit) over the three year
period from issuance to maturity. The accretion in the first quarter of
1999 aggregated approximately $282,000. If the Company elects to settle
the redemption in Class A Common Stock the Mandatory Redemption Price is
1.25 times the purchase price and would result in an additional charge
in the period of redemption.
Holders of the Series B Preferred Stock have the right to require the
Company to purchase their shares for cash upon the occurrence of a
Redemption Event. Redemption Events include: a) suspension of trading or
delisting from specified stock exchanges of the Class A Common Stock
into which the Series B Preferred Stock is convertible; b) failure by
the Company to cause the holders to be able to utilize the registration
statement filed for the resale of the shares of the Class A Common Stock
shares into which the Series B Preferred Stock is convertible; c)
failure to issue Common Stock upon exercise of conversion rights by a
preferred shareholder, or d) failure to pay any amounts due to preferred
shareholders. The cash purchase price upon occurrence of a Redemption
Event is the greater of a) 1.25 times the Mandatory Redemption Price, or
b) the Mandatory Redemption Price divided by the product of the
effective conversion price and the market value of the common shares.
Any remaining accretion to the actual cash purchase price would be
recorded upon a Redemption Event.
The Series B Preferred Stock is mandatorily redeemable upon the
occurrence of a Redemption Event at the election of the holder and,
accordingly, is classified as Redeemable Convertible Preferred Stock,
rather than as a component of Shareholders' Equity (Deficit).
The Series B Preferred Stock has a liquidation preference as to their
principal amount and any accrued and unpaid dividends. The Company has
reserved 7,068,465 shares of Class A Common Stock for conversion of
Series B Preferred Stock and exercise of certain common stock warrants
held by the preferred shareholders.
The holders of the Series B Preferred Stock have the same voting rights
as the holders of Class A Common Stock, calculated as if all outstanding
shares of Series B Preferred Stock had been converted into shares of
Class A Common Stock on the record date for determination of
shareholders entitled to vote on the matter presented, subject to
limitations applicable to certain holders.
For each $1 million of the Series A Preferred Stock held by the holders
of Series B Preferred Stock on September 1, 1998 and thereafter
converted at a conversion price of $4.00 or more, the holders of Series
B Preferred Stock received four-year warrants to purchase 80,000 shares
of Class A Common Stock exercisable at $3.00 per share. The issuance of
one-half of the warrants was effected by modifying certain provisions of
existing warrants held by the Series B Preferred Stockholders. The
Company may force the exercise of the warrants if, among other things,
the Class A Common Stock trades at $4.00 or more for 20 consecutive
trading days and the aggregate of cash (and cash equivalents) as shown
on the Company's most recent balance sheet is $5,000,000 or more. If
there is a forced exercise, the exercise price of certain other existing
warrants held by the Series B Preferred Stockholders would be modified
to the lesser of (i) market value and (ii) the exercise price then in
effect. See Note H to the Consolidated Financial Statements.
9
<PAGE>
F. Segment Information
The Company is organized and operates as a single segment. The following
tabulation details the Company's operations in different geographic
areas for the three months ended March 31, 1999 and 1998 (dollars in
thousands):
<TABLE>
<CAPTION>
- ------------------------------------------ ------------------- ---------------------- --------------------- ----------------------
United States Europe Eliminations Consolidated
- ------------------------------------------ ------------------- ---------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Three Months Ended March 31, 1999:
Revenues from unaffiliated sources $1,075 $ 594 $ -- $ 1,669
- ------------------------------------------ ------------------- ---------------------- --------------------- ----------------------
Identifiable assets at March 31, 1999 $35,517 $ 998 $ (6,923) $ 29,592
- ------------------------------------------ ------------------- ---------------------- --------------------- ----------------------
- ------------------------------------------ ------------------- ---------------------- --------------------- ----------------------
Three Months Ended March 31, 1998:
- ------------------------------------------ ------------------- ---------------------- --------------------- ----------------------
- ------------------------------------------ ------------------- ---------------------- --------------------- ----------------------
Revenues from unaffiliated sources $529 $ 381 $ -- $ 910
- ------------------------------------------ ------------------- ---------------------- --------------------- ----------------------
- ------------------------------------------ ------------------- ---------------------- --------------------- ----------------------
Identifiable assets at March 31, 1998 $ 33,736 $ 1,479 $ (4,775) $ 30,440
- ------------------------------------------ ------------------- ---------------------- --------------------- ----------------------
</TABLE>
G. Discontinued Operations
On October 27, 1997 the Company entered into an agreement to sell its
Government Technology Division ("GTD") to Strategic Technology Systems,
Inc. ("Strategic"). The net assets of the GTD were sold to Strategic at
the close of business on December 31, 1997.
The agreement between the Company and Strategic, 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 Strategic.
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 has 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.
The Company also received a warrant from Strategic exercisable for that
number of shares of the voting common stock of Strategic 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 Strategic. Upon the sale of Strategic
prior to any such initial underwritten public offering, the Company
would receive 15% of the gross proceeds of such transaction that are in
excess of $7 million, and the warrant described above would be
cancelled.
The Company subleased to Strategic 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.
See Note H to the Consolidated Financial Statements.
<PAGE>
H. Subsequent Events
On March 17, 1999, Drew Sycoff, a principal of Andrew Garrett, Inc.,
suggested to Thomas E. Gardner, the Chief Executive Officer of the
Company, on behalf of Mr. Sycoff's clients, including Jesse L. Upchurch,
the beneficial owner of more than 40% of the combined voting power of
the Company, that Mr. Gardner should consider resigning and that if he
were to resign, that Mr. Sycoff would be able to negotiate a transition.
In a subsequent conversation on the same day, Mr. Gardner offered Mr.
Sycoff an opportunity to present his viewpoints to the board of
directors of the Company and offered to call a special meeting of the
Board if Mr. Sycoff wanted an early meeting. Mr. Sycoff indicated that
the matter was not urgent and such presentation, if one were to be made,
could wait at least until after the annual meeting of shareholders which
was then anticipated to be held in May 1999. On April 1, 1999, at a
meeting of the Board, the Board gave to Mr. Gardner its unqualified
continuing support. However, on April 2, 1999, Mr. Sycoff, on behalf of
his clients, demanded Mr. Gardner's resignation, and the resignations of
the entire Board of Directors. Mr. Sycoff also indicated that unless the
Board resigned before the annual meeting of shareholders, he would, on
behalf of the shareholders whom he represented, commence a proxy contest
with respect to the annual election of directors.
11
<PAGE>
On April 15, 1999 Mr. Sycoff rescinded his request for the resignations
of Mr. Gardner and the Board of Directors. The Board then nominated Mr.
Sycoff's group's two nominees to the Company's Board of Directors. There
have been no other related developments at the time of the filing of
this quarterly report on Form 10-Q.
On April 21, 1999, the Company loaned an additional $450,000 to Select
under the aforementioned promissory note.
On April 30, 1999, Strategic was sold to Smiths Industries ("Smiths"), a
defense industry competitor. The Company, as per the terms of the
agreement noted above, received an initial cash payment on May 3, 1999
of $1.0 million, and is anticipating an additional final payment of
approximately $0.1 million during May 1999. The unsecured promissory
note issued by Strategic to the Company for $1,975,000 has been assumed
by, and the sublease has been guaranteed by, Smiths as of the sale date.
The Company's warrant to purchase shares of Strategic, described above,
was cancelled as of the sale date.
On May 14, 1999, NASDAQ notified the Company that it proposed to delist
the Class A Common Stock because its computation indicated that the
Company is not in compliance with its minimum net tangible asset
requirement. Since the Company disagrees with NASDAQ's computation and
determination and believes that it is in compliance with NASDAQ's
listing requirements, the Company is appealing the determination. The
appeal stays the delisting action pending a final decision by NASDAQ.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This section should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Annual Report on Form 10-K for the period ended December 31, 1998, as
amended.
Three Months ended March 31, 1999 compared with Three Months ended March 31,
1998
Continuing Operations
Revenues
Company revenues increased 83% to $1.7 million in the period ended March
31, 1999 as compared to $0.9 million in the period ended March 31, 1998.
Revenues for the 1999 period were derived 37% from software licenses and
enhancements, and 63% from services, installations and maintenance, compared to
revenues for the 1998 period which were derived 41% from software licenses and
enhancements and 59% from services, installations and maintenance.
Cost of Sales
Cost of sales, which includes amortization of software development costs
for PHARMASYST(TM) and BASE10(TM)ME, decreased from $2.4 million in the period
ended March 31, 1998 to $1.5 million in the 1999 period. The decrease is
primarily due to lower amortization of software development costs of $0.5
million as well as reduced labor and related expenses.
Research and Development Costs
Research and development costs increased to $0.5 million in the 1999
period as compared to $0.1 million in the 1998 period. The increase is related
to additional salaries and related expenses in the 1999 period being dedicated
to developing future versions of the Company's products.
Sales and Marketing Expenses
Company sales and marketing expenses increased in the 1999 period to $1.4
million from $1.2 million in the quarter ended March 31, 1998. This rise was
mainly due to increases in salaries and related expenses resulting from the
hiring of additional personnel and increased sales commissions which resulted
from increased revenues.
General and Administrative Expenses
Company general and administrative expenses increased in the 1999 period
to $2.2 million from $1.4 million in the comparable 1998 period. The increase in
the 1999 period is primarily due to increased realized expenses of $0.2 million
related to the uPACS(TM) operation, which, as of mid-January 1999, is being
funded by the Company, as well as an increase in general reserves related to
professional fees.
<PAGE>
Debt Conversion Costs
Debt conversion costs in the 1999 period relate to a non-cash accounting
charge of $3.5 million related to the conversion of the $10 million debenture in
March 1999. The debenture was issued in August 1996 to Jesse L. Upchurch, who is
currently a principal shareholder of the Company. The conversion, as a result of
the modification of the conversion price from $12.50 to $4.00, resulted in an
issuance of 2,500,000 shares of Class A Common Stock, as compared to 800,000
shares which would have potentially been converted at the $12.50 price. This
non-cash charge is arrived at by assigning a fair value to the additional
1,700,000 shares issued by the Company as a result of the modification in
conversion price. In addition, there was a charge of $0.1 million related to the
March 1999 re-pricing of warrants issued to the agent of the debenture holder.
This non-cash expense has no effect on cash flows or the Company's net tangible
asset balance.
12
<PAGE>
Other Expense
Other expense decreased from $0.2 million in the 1998 period to $0.1
million in the 1999 period. Other expense in 1999 is primarily comprised of
interest expense of $0.3 million, offset by $0.2 million of interest and other
income. In the 1998 period, other expense was comprised of interest expense of
$0.5 million, offset by $0.3 million of interest and other income. Interest
expense decreased in the 1999 period as a result of the conversion of the
Company's long-term debt, which was negotiated and approved by the shareholders
in 1998 and was completed in March 1999.
Continuing Losses
The Company incurred a net loss of $7.5 million in the quarter ended March
31, 1999, compared to a $4.4 million net loss for the quarter ended March 31,
1998. The increased loss in the 1999 period was primarily due to the non-cash
accounting charge of $3.5 million related to the conversion of the $10 million
debenture, partially offset by increased revenues of $0.8 million, combined with
a decrease in amortization of software development costs of $0.5 million. The
Company expects additional losses during the remainder of 1999. The Company's
ability to achieve profitable operations is dependent upon, among other things,
ongoing successful development of its BASE10(TM)ME, BASE10(TM)CS, 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.*
Readiness for the Year 2000
Generally, in today's business environment, some computers, software, and
other equipment include programming code in which calendar year data is
abbreviated to only two digits. As a result of this design decision, some of
these systems could fail to operate or fail to produce correct results if "00"
is interpreted to mean 1900, rather than 2000. The Company, in anticipating the
year 2000, has kept the potential for this problem (the "Y2K Problem") in mind
when purchasing new computers, software and equipment during the past year. The
Company has also considered the Y2K Problem when developing new products for
sale to customers.
Company Readiness. The Y2K Problem could affect computers, software, and
other equipment used, operated, or maintained by the Company. Accordingly,
during the second quarter of 1998, the Company formed an internal Y2K committee
whose goal is to minimize any disruptions of the Company's business and to limit
the Company's liabilities resulting from the Y2K Problem. As a result, the
Company has reviewed its internal computer programs and systems, as well as the
software that the Company develops and sells to customers, to determine if the
programs and systems will be Y2K compliant.
Information Technology Systems. During the first quarter of 1998, the
Company, in anticipation of the year 2000, replaced its existing financial
accounting software system, which the Company deems to be a business-critical
system, with a system which is vendor-certified Y2K compliant.
The Company believes that it has identified substantially all of the major
computers, software applications, and related equipment used in connection with
its internal operations that must be replaced or upgraded to minimize the
possibility of a material disruption to its business. The Company presently
believes that computer systems which are not currently Y2K-compliant will be
replaced or upgraded in the normal replacement cycle prior to the year 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.
<PAGE>
Software Sold to Customers. The Company believes that it has substantially
identified and resolved all potential Y2K Problems with its MES software, 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.
13
<PAGE>
Certain customers have earlier versions of the Company's MES software,
PHARM2(TM) (prior to version 2.3) and PHARMASYST(TM) which have not 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 for a fee to the extent they require
assistance. It is a small number of customers that still operate with these
earlier versions, and the Company believes that Y2K issues, if any, related to
these earlier versions of the Company's software product will not require any
material financial or human resources.
Also, some customers have earlier versions of BASE10(TM)FS (prior to
version 3.4) which have not been tested for Y2K compliance. However, the Company
has a standard upgrade path in place for bringing all of these earlier versions
into Y2K compliance if the customer wishes to do so.
Costs of Compliance. The Company currently believes that its computer
systems will be Y2K compliant in a timely manner, and estimates the total costs
to the Company of completing any required replacements or upgrades of these
internal systems will not have a material adverse effect on the Company's
business or results of operations, although no assurances can be given. Costs to
be incurred are expected to be immaterial and are currently estimated at less
than $100,000.
Third Party Suppliers. The Company has initiated communications with third
party suppliers of the major computers, software, and other equipment used,
operated, or maintained by the Company to identify and, to the extent possible,
to resolve issues involving the Y2K Problem. While the majority of the Company's
significant suppliers are software industry leaders and have committed to
upgrades to resolve any Y2K Problems, the Company has limited or no control over
the actions of these third party suppliers. Thus, while the Company expects that
it will be able to resolve any significant Y2K Problems with these systems,
there can be no assurance that these suppliers will resolve any or all Y2K
Problems with these systems before the occurrence of a material disruption to
the business of the Company or any of its customers. Any failure of these third
parties to resolve Y2K Problems with their systems in a timely manner could, but
is not currently expected to, have a material adverse effect on the Company's
business, financial condition, and results of operations.
Most Likely Consequences of Year 2000 Problems. The Company expects to
identify and resolve all Y2K Problems that could have a material adverse effect
on its business operations prior to the year 2000. However, management believes
that it is not possible to determine with complete certainty that all Y2K
Problems affecting the Company will be identified or corrected. It is not
possible to accurately predict how many Y2K Problem-related failures will occur
or the severity, duration, or financial consequences of any such failures. As a
result, management expects that the Company, under a worst-case scenario, could
suffer the following consequences: (a) a significant number of operational
inconveniences and inefficiencies for the Company and its clients that may
divert management's time and attention and financial and human resources from
its ordinary business activities; and (b) a small number of serious system
failures related to older versions of the Company's PHARMASYST(TM) and
PHARM2(TM) products that may require significant efforts by the Company and/or
its customers to prevent or alleviate material business disruptions.
Contingency Plans. The Company is currently developing contingency plans
to be implemented as part of its effort to identify and correct Y2K Problems
that may affect its internal systems, software and third party suppliers. The
Company currently expects to complete its contingency plans during mid-1999.
Depending on the systems affected, these plans could include accelerated
replacement of affected third party equipment or software (the timing of which
would occur in the third quarter of 1999), the hiring of additional personnel
and/or increased work hours for Company personnel to correct, on an accelerated
schedule, any Y2K Problems that arise with the earlier versions of
PHARMASYST(TM) and PHARM2(TM) software sold to customers, and/or similar
approaches to any Y2K Problems that may occur. If the Company is required to
implement any of these contingency plans, it could, but is not currently
expected to, have a material adverse effect on the Company's financial condition
and results of operations.
Based on the Company's current analysis of the Y2K Problem, as described
above, the Company does not believe that the Y2K Problem will have a material
adverse effect on the Company's business or results of operations.
<PAGE>
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.
14
<PAGE>
Liquidity and Capital Resources
The Company's working capital decreased from $15.5 million to $12.2
million during the quarter ended March 31, 1999. The Company had $13.3 million
of cash at March 31, 1999 whereas the Company had $17.4 million of cash at
December 31, 1998. The decrease in cash during the three months ended March 31,
1999 resulted primarily from the use of cash in operations of $4.2 million.
In 1999 cash used in operations has been affected primarily by the net
loss of $7.5 million (largely offset by the $3.5 million non-cash accounting
charge related to the $10 million debenture conversion), an increase of $0.4
million in accounts receivable, the $0.7 million loan to Select, and a reduction
of $0.4 million in accounts payable and accrued expenses. These uses of cash
have been partially offset by amortization and depreciation of $0.7 million,
included in the aforementioned net loss amount, and by an increase in deferred
revenue of $0.6 million.
The Company's financial statements have been prepared on the basis that it
will continue as a going concern. The Company has incurred significant operating
losses and negative cash flows in recent years. Also, at December 31, 1998 the
Company was below the $4 million minimum net tangible assets required for its
current listing on the NASDAQ National Market System. In March 1999, the
Company's shareholders' equity was increased by approximately $9.6 million
through the conversion of its $10 million convertible debenture into Class A
Common Stock. Coincident with that debt conversion, the Company's Series A
Preferred Stock was exchanged for Series B Preferred Stock. These Preferred
Stocks have certain Redemption Events, which if such events occurred, would
provide the holder with the right to require the Company to purchase their
shares for cash which would adversely affect the Company. (See Note D to the
Consolidated Financial Statements.) Accordingly, where these rights exist such
redeemable securities are categorized outside of shareholders' equity and, thus,
may not qualify as equity for the purposes of the NASDAQ minimum net tangible
asset requirement. Also, securityholders may have other rights/claims in
connection with the March 1999 transactions described above.
To further increase the Company's net tangible assets and in order to help
further ensure the Company's compliance with NASDAQ listing requirements,
management is in the process of negotiating with all participants in the March
1999 Preferred Stock exchange to obtain waivers of any redemption or rescission
rights. These waivers, if obtained, would eliminate cash redemption rights where
the redemption event is beyond the control of the Company. This would qualify
all related securities for classification in permanent stockholders' equity and
increase the Company's qualifying net tangible assets. If such waivers are
obtained, then management believes that the Company's current liquidity would be
sufficient to meet its cash needs for its existing business through fiscal 1999.
However, there can be no assurance that management's efforts in this regard will
be successful.
If management is not successful in obtaining such waivers, and it
continues to incur operating losses it could fall below the minimum net asset
requirement needed to qualify for ongoing listing on NASDAQ. Management's plans
in this regard include, among other things, (i) attempting to improve operating
cash flow through increased license sales and service revenue, and (ii)
increasing the level of anticipated streamlining of its selling, administration
and development functions. However there is no assurance that such plans, if
implemented, will be sufficient.
Also, the Company is considering certain significant acquisitions which
depending on net liabilities assumed, if any, and on the success of cost
reduction efforts to bring the target's operations to net positive cash flow,
may require additional funding. (See Note C to the Consolidated Financial
Statements.) However, there can be no assurance that such acquisitions will
occur, or whether additional funds required, if any, would be available to Base
Ten.
If current cash and working capital, reduced by cash used in operations in
1999, are not sufficient to satisfy the Company's liquidity and minimum net
tangible asset requirements, the Company will seek to obtain additional equity
financing. Additional funding may not be available when needed or on terms
acceptable to the Company. If the Company were required to raise additional
financing for the matters described above and/or to continue to fund expansion,
develop and enhance products and services, or otherwise respond to competitive
pressures, there is no assurance that adequate funds will be available or that
they will be available on terms acceptable to the Company. Such a limitation
could have a material adverse effect on the Company's business; financial
condition or operations and the financial statements do not include any
adjustment that could result therefrom.
On March 5, 1999, the holder of the $10 million, 9.01% convertible
debenture converted this debenture into 2,500,000 shares of Class A Common Stock
which increased shareholders' equity by approximately $9.6 million including a
first quarter 1999 non-cash charge of approximately $3.5 million.
15
<PAGE>
On November 10, 1998, the shareholders approved the sale and issuance of
Series B Preferred Stock in exchange for Series A Preferred Stock (subject to
the execution of definitive agreements) and the issuance of Class A Common Stock
Purchase Warrants to the Series B Convertible Preferred Stockholders. On March
5, 1999, the outstanding shares of Series A Preferred Stock were exchanged for
Series B Preferred Stock. This exchange resulted in a non-cash credit to net
loss available to common shareholders of $445,000 in the quarter ended March 31,
1999. For further discussion of the Series A and B Preferred Stock see Note E to
the Consolidated Financial Statements.
For each $1 million of the Series A Preferred Stock held by the holders of
Series B Preferred Stock on September 1, 1998 and thereafter converted at a
conversion price of $4.00 or more, the holders of Series B Preferred Stock
received four-year warrants to purchase 80,000 shares of Class A Common Stock
exercisable at $3.00 per share. The issuance of one-half of the warrants was
effected by modifying certain provisions of existing warrants held by the Series
B Preferred Stockholders. The Company may force the exercise of the warrants if,
among other things, the Class A Common Stock trades at $4.00 or more for 20
consecutive trading days and the aggregate of cash (and cash equivalents) as
shown on the Company's most recent balance sheet is $5,000,000 or more. If there
is a forced exercise, the exercise price of certain other existing warrants held
by the Series B Preferred Stockholders would be modified to the lesser of (i)
market value and (ii) the exercise price then in effect.
As discussed in the 1998 Annual Report on Form 10-K, the Company is a 9%
shareholder in uPACS LLC, a limited liability company which has developed a
system for archiving ultrasound images with networking, communication and
off-line measurement capabilities. During the fourth quarter of 1998, the
Company determined that it did not have the required resources to devote to both
its core manufacturing execution software business and the uPACS(TM) business,
and as a result, initiated a search for a potential buyer of the LLC and its
technology. At December 31, 1998, the LLC had substantially exhausted its
capital resources and, as of the filing date of this quarterly report on Form
10-Q, a buyer had not yet been located. The Company has funded the LLC's
operation during the search for a buyer.
On March 16, 1999, the Company's Board of Directors agreed to proceed with
negotiations with the acquisition of Almedica Technology Group ("Almedica"), a
wholly owned subsidiary of Almedica International, Inc. in a stock transaction.
Almedica develops clinical label and materials management software for the
pharmaceutical industry essential to the management of clinical trials. The
acquisition, which is subject to the negotiation of final terms and related
execution of a definitive agreement, is expected to close before the end of May
1999. The Company currently anticipates cash outlays related to this acquisition
of Almedica to be approximately $0.5-$1.0 million for fiscal 1999. *
On March 16, 1999, the Company's Board of Directors approved the
commencement of preliminary discussions which could lead to an acquisition of
Select Software Tools, plc (NASDAQ: SLCTY) ("Select") in a stock transaction.
Also, in connection with these preliminary discussions with Select, the Company
agreed to loan Select up to $1.0 million. The acquisition is subject to the
negotiation of final terms and execution of a definitive purchase agreement, and
the approval of Select stockholders. On March 26, 1999, the Company loaned $0.7
million to Select under a promissory note and on April 21, 1999, loaned $0.4
million under a second promissory note. If the Select acquisition occurs, the
Company currently expects cash outlays related to the acquisition of Select to
be approximately $5 million for fiscal 1999, including the $1.1 million loans. *
The Company believes that Select took certain restructuring actions in the
second half of 1998 and early 1999 in an effort to significantly reduce its
expense base. The Company and Select have initially identified additional cost
reductions which are intended to bring Select to break-even by closing or
shortly after the date of acquisition by Base Ten. If the Select acquisition
occurs, depending on net liabilities of Select assumed by the Company at the
date of acquisition, if any, and on the success of these cost reduction efforts,
in bringing Select to net positive cashflow, the Company may need to acquire
additional funding in 1999. *
<PAGE>
The Company is currently evaluating its selling, administrative and
development functions with the intention of further streamlining operations and
reducing operating expenses. The Company anticipates that decisions based on
this evaluation will be made in the first half of 1999. Ensuing actions may
result in certain nonrecurring charges during 1999; the extent of such charges
is not yet quantifiable.
On March 17, 1999, Drew Sycoff, a principal of Andrew Garrett, Inc.,
suggested to Thomas E. Gardner, the Chief Executive Officer of the Company, on
behalf of Mr. Sycoff's clients, including Jesse L. Upchurch, the beneficial
owner of more than 40% of the combined voting power of the Company, that Mr.
Gardner should consider resigning and that if he were to resign, that Mr. Sycoff
would be able to negotiate a transition. In a subsequent conversation on the
same day, Mr. Gardner offered Mr. Sycoff an opportunity to present his
viewpoints to the board of directors of the Company and offered to call a
special meeting of the Board if Mr. Sycoff wanted an early meeting. Mr. Sycoff
indicated that the matter was not urgent and such presentation, if one were to
be made, could wait at least until after the annual meeting of shareholders
which was then anticipated to be held in May 1999. On April 1, 1999, at a
meeting of the Board, the Board gave to Mr. Gardner its unqualified continuing
support. However, on April 2, 1999, Mr. Sycoff, on behalf of his clients,
demanded Mr. Gardner's resignation, and the resignations of the entire Board.
Mr. Sycoff also indicated that unless the Board of Directors resigned before the
annual meeting of shareholders, he would, on behalf of the shareholders whom he
represented, commence a proxy contest with respect to the annual election of
directors.
16
<PAGE>
On April 15, 1999 Mr. Sycoff rescinded his request for the resignations of
Mr. Gardner and the Board of Directors. The Board then nominated Mr. Sycoff's
group's two nominees to the Company's Board of Directors. There have been no
other related developments at the time of the filing of this quarterly report on
Form 10-Q.
The Company is relying on its leading products, BASE10(TM)ME, BASE10(TM)CS
and BASE10(TM)FS to stimulate new orders. Neither the additional development of
the Company's MES products nor the consequential generation of cash can be
assured, either in time or amount, nor is there any assurance that such amounts
will be sufficient for the Company's needs. In the absence of such orders or the
promise thereof, neither of which can be assured, as well as in connection with
its expected capital needs for the year 2000 and beyond, the Company may elect
to seek additional sources of capital and may also elect to reduce the pace of
its development of its products and/or establish other cost reduction measures,
which could adversely impact the Company. In the event the Company elects to
seek additional capital there can be no assurance that such funds or capital
would be available on the terms or in the amounts needed. *
*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. 333-70535) 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.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
17
<PAGE>
Part II. Other Information
Item 2: Changes in Securities and Use of Proceeds
On November 10, 1998, the shareholders approved the modification of the
conversion price of the Company's $10 million, 9.01% convertible debenture from
$12.50 to $4.00 per share of Class A Common Stock, and the sale and issuance of
Series B Preferred Stock (subject to the execution of definitive agreements) and
the issuance of Class A Common Stock Purchase Warrants to the Series A Preferred
Stockholders that would receive Series B Preferred Stock.
On March 5, 1999, the holder of the $10 million, 9.01% convertible debenture
converted this debenture into 2,500,000 shares of Class A Common Stock which
increased shareholders' equity by approximately $9.6 million including a first
quarter 1999 non-cash charge of approximately $3.5 million. This conversion
eliminated the balance of the Company's long-term debt.
Also on March 5, 1999, the sale and issuance of Series B Preferred Stock to
the Series A Preferred Stockholders occurred and was in the form of an even
exchange for Series A Preferred Stock. Warrants to purchase Class A Common Stock
were issued to the Series B Preferred Stockholders and certain existing warrants
held by such holders were modified. See Note E to the Consolidated Financial
Statements.
18
<PAGE>
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.
19
<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: May 17, 1999
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)
20
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