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, 2000 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
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 May 4, 2000
Class A Common Stock, $5.00 par value 5,104,907
Class B Common Stock, $5.00 par value 13,381
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Base Ten Systems, Inc.
And Subsidiaries
Index
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Part I. Financial Information Page
Item 1: Financial Statements
Consolidated Balance Sheets - March 31, 2000 (unaudited)
and December 31, 1999 (audited)............................................................. 1
Consolidated Statements of Operations - Three months
ended March 31, 2000 and 1999 (unaudited)................................................... 2
Consolidated Statements of Common Stock and Other Shareholders' Equity (Deficit) - Three
months ended March 31, 2000 (unaudited)...................................................... 3
Consolidated Statements of Cash Flows - Three months ended
March 31, 2000 and 1999 (unaudited)......................................................... 4
Notes to Consolidated Financial Statements.................................................. 5
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................................... 10
Item 3: Quantitative and Qualitative Disclosures About Market Risk .......................... 13
Part II. Other Information
Item 6: Exhibits and Reports on Form 8-K............................................... 14
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Item 1. Financial Statements
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Base Ten Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except par value)
Assets
March 31, December 31,
2000 1999
(unaudited) (audited)
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Current Assets:
Cash and cash equivalents................................................. $ 4,097 $ 5,843
Accounts receivable, net.................................................... 791 559
Current portion of notes receivable......................................... 658 658
Other current assets........................................................ 472 441
------------------- --------------------
Total Current Assets.................................................. 6,018 7,501
Property, plant and equipment, net............................................. 4,296 4,564
Note receivable................................................................ 1,317 1,317
Acquired intangible assets..................................................... 4,763 5,210
Other assets................................................................... 460 485
------------------- --------------------
Total Assets $ 16,854 $ 19,077
=================== ====================
Liabilities, Redeemable Convertible Preferred Stock, Common Stock
and Other Shareholders' Deficit
Current Liabilities:
Accounts payable............................................................ $ 259 $ 345
Accrued expenses............................................................ 1,670 1,770
Deferred revenue............................................................ 2,046 1,423
Current portion of financing obligation..................................... 141 136
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Total Current Liabilities............................................. 4,116 3,674
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Long-Term Liabilities:
Financing obligation........................................................ 3,166 3,204
Other long-term liabilities................................................. 204 214
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Total Long-Term Liabilities........................................... 3,370 3,418
------------------- --------------------
Commitments and Contingencies
Series B Preferred Stock, $1.00 par value, issued and outstanding 15,203 shares
at March 31, 2000 and December 31, 1999; aggregate liquidation value of
$15,203
at March 31, 2000 and December 31, 1999.................................... 19,004 19,004
Common Stock and Other Shareholders' Deficit:
Class A Common Stock, $5.00 par value, 12,000,000 shares authorized; issued
and outstanding 5,104,907 shares at March 31, 2000 and 5,102,096 at
December 31, 1999......................................................... 25,524 25,510
Class B Common Stock, $5.00 par value, 400,000 shares authorized; issued and
outstanding 13,381 shares at March 31, 2000 and 14,181 shares at December
31, 1999................................................................. 67 71
Additional paid-in capital.................................................. 63,521 63,527
Accumulated Deficit......................................................... (98,358) (95,754)
Accumulated other comprehensive gain (loss) (109) (92)
Treasury Stock, 100,000 Class A Common Shares, at cost...................... (281) (281)
------------------- --------------------
Total Shareholders' Deficit........................................... (9,636) (7,019)
------------------- --------------------
Total Liabilities, Redeemable Convertible Preferred Stock, and
Shareholders' Deficit................................................. $ 16,854 $ 19,077
=================== ====================
</TABLE>
See Notes to the Consolidated Financial Statements
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Base Ten Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
(dollars in thousands, except per share data)
Three months Three months
ended ended
March 31, 2000 March 31, 2000
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License and related revenue............................................. $ 122 $ 616
Services and related revenue............................................ 849 1,053
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971 1,669
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Cost of revenues........................................................ 1,134 1,495
Research and development................................................ 530 459
Selling and marketing................................................... 658 1,418
General and administrative.............................................. 1,164 2,196
Non-cash debt conversion charge......................................... -- 3,506
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3,486 9,074
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Loss before other expense............................................... (2,515) (7,405)
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Other expense, net...................................................... 89 54
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Net loss ............................................................... (2,604) (7,459)
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Less: Dividends on Redeemable Convertible Preferred Stock............. -- (262)
Accretion on Redeemable Convertible Preferred Stock............. -- (282)
Credit on exchange of Redeemable Convertible
Preferred Stock............................................ -- 445
------------------- --------------------
Net loss available for common shareholders.............................. $ (2,604) $ (7,558)
=================== ====================
Basic and diluted net loss per share.................................... $ (0.51) $ (1.94)
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Weighted average common shares outstanding - basic
and diluted....................................................... 5,118,000 3,905,000
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</TABLE>
See Notes to the Consolidated Financial Statements
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<TABLE>
<CAPTION>
Base Ten Systems, Inc. and Subsidiaries
Consolidated Statements of Common Stock and Other Shareholders' Deficit
(unaudited)
(dollars in thousands)
Total Common
Accumulated Stock and
Class A Class B Additional Other Other
Common Stock Common Stock Paid-In Accumulated Comprehensive Treasury Stock Shareholders'
Shares Amount Shares Amount Capital Deficit Loss Shares Amount Deficit
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Balance at
December 31, 1999 5,102,096 $ 25,510 14,181 $ 71 $ 63,527 $(95,754) $ (92) (100,000) $ (281) $ (7,019)
====================== ========== ======== ======== ======== ======== ========== ============== ========== ========== ==========
Conversions:
Common B to
Common A 1,200 6 (800) (4) (2) -- -- -- -- --
Issuance of
Common Stock:
Employee stock
purchase plan 1,611 8 -- -- (4) -- -- -- -- 4
Comprehensive
Loss:
Net loss -- -- -- -- -- (2,604) -- -- -- (2,604)
Foreign currency
translation -- -- -- -- -- -- (7) -- -- (7)
Unrealized loss on
securities available
for sale -- -- -- -- -- -- (10) -- -- (10)
----------
Total Comprehensive
Loss (2,621)
- - - - ---------------------- ---------- -------- -------- -------- -------- ---------- -------------- ---------- ---------- ----------
Balance at
March 31, 2000 5,104,907 $ 25,524 13,381 $ 67 $ 63,521 $(98,358) $ (109) (100,000) $ (281) $ (9,636)
====================== ========== ======== ======== ======== ======== ========== ============== ========== ========== ==========
</TABLE>
See Notes to the Consolidated Financial Statements
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<CAPTION>
Base Ten Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
(dollars in thousands)
Three Months Three Months
Ended Ended
March 31, 2000 March 31, 1999
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Cash Flows from Operating Activities:
Net loss .................................................... $ (2,604) $ (7,459)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Depreciation and amortization................................ 573 751
Non-cash debt conversion charge.............................. -- 3,506
Deferred gain on sale of building............................ (5) (5)
Changes in operating assets and liabilities:
Accounts receivable.......................................... (232) (381)
Other current assets......................................... (41) (672)
Other assets................................................. 25 --
Accounts payable, accrued expenses and deferred revenue...... 432 171
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Net Cash Used in Operations............................................. (1,852) (4,089)
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Cash Flows from Investing Activities:
Additions to property, plant and equipment................... (21) (29)
Loss on disposition of assets................................ 163 --
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Net Cash Provided by (Used in) Investing Activities..................... 142 (29)
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Cash Flows from Financing Activities:
Repayment of amounts borrowed................................ (33) (16)
Proceeds from issuance of common stock....................... 4 28
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Net Cash (Used in) provided by Financing Activities..................... (29) 12
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Effect of Exchange Rate Changes on Cash................................. (7) (48)
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Net (Decrease)/Increase In Cash......................................... (1,746) (4,154)
Cash, beginning of period............................................... 5,843 17,437
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Cash, end of period..................................................... $ 4,097 $ 13,283
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Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest..................... $ 121 $ 572
</TABLE>
See Notes to the Consolidated Financial Statements
<PAGE>
Base Ten Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2000
(Unaudited)
A. Basis of Presentation and Liquidity
- - - - -----------------------------------------
The financial statements of Base Ten Systems, Inc. and subsidiaries (the
"Company" or "Base Ten") 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. At March 31,
2000 the Company was below certain criteria required for its current
listing on the NASDAQ SmallCap Market System which, unless the Company
raises sufficient additional capital in the immediate future, could result
in the Company's shares being delisted from the NASDAQ SmallCap Market
System. If the Company's Class A Common Stock is suspended from trading or
delisted for an aggregate of 30 trading days in any 18 month period, or
upon the occurrence of any other redemption event, holders of the
Company's Series B Redeemable Convertible Preferred Stock may require the
Company to redeem the Series B Redeemable Convertible Preferred Stock for
cash of 1.25 times the Mandatory Redemption Price. Such cash redemption
would aggregate approximately $19.0 million, plus any other contingent
payments which may become due pursuant to the terms of the Series B
Redeemable Convertible Preferred Stock. (See Note E to the Consolidated
Financial Statements.) The Company does not currently have sufficient cash
or credit to pay such amounts should there be a demand for payment. To
increase the Company's net tangible assets, to help ensure the Company's
compliance with NASDAQ listing requirements and to enable the Company to
fund its operations through 2000, management is seeking the infusion of
additional capital financing. If such efforts are not successful, there
would be a material adverse effect on the Company's financial position and
operations and its ability to continue as a going concern. These financial
statements do not include any adjustments that could result therefrom.
On May 11, 2000, the NASD notified the Company that it failed to meet the
NASDAQ SmallCap Market System continued listing criteria. The NASD
specifically inquired about the Company's ability to meet the NASDAQ
SmallCap Market System $2.0 million minimum net tangible asset
requirement, the $35.0 million minimum market capitalization requirement
and its $0.5 million minimum net income requirement. In order to
facilitate the NASD's review of the Company's eligibility for continued
listing on the NASDAQ SmallCap Market System, the Company must submit on
or before May 25, 2000 its plan for achieving and sustaining compliance
with all of the listing criteria.
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, 1999. The
results of operations for the three months ended March 31, 2000 are not
necessarily indicative of the operating results for the full year. In
management's opinion, all adjustments necessary for a fair presentation of
the financial statements are reflected in the accompanying statements.
Certain reclassifications have been made to prior year financial
statements to conform to the current year presentation.
B. Description of Business
- - - - -----------------------------
The Company develops, manufactures and markets computer software systems
that assist manufacturers in industries regulated by the Food and Drug
Administration ("FDA"). The Company's software systems aid customers in
complying with FDA current Good Manufacturing Practice ("cGMP")
guidelines, and improve their overall productivity by automating certain
manual processes. The Company's software systems include BASE10(R)ME and
BASE10(R)FS, which are "Manufacturing Execution Systems." BASE10(R)ME uses
Windows NT operating systems and BASE10(R)FS uses HP-UX and Digital
VAX/VMS operating systems. The Company's software systems also include
BASE10(R)CS, BASE10(R)ADLS and BASE10(R)ADMS, which are "Clinical Supply
Chain Management Solutions." These software systems assist clinical
specialists in managing supplies for clinical trials. BASE10(R)CS uses
Windows NT operating systems. BASE10(R)ADLS and BASE10(R)ADMS, formerly
known as ADLS and ADMS, respectively, were acquired from Almedica
International, Inc.
During 2000, contracts to provide software and services to certain
customers were terminated due to the Company's inability to meet delivery
deadlines for version 3.2 of BASE10(R)ME which was caused by the
substantial customization of the core product required for those projects.
The termination of those contracts will allow the Company to reallocate
resources to other projects requiring less substantial customization. To
reduce its dependence on the BASE10(R)ME and BASE10(R)CS products, the
Company announced plans to more aggressively market the BASE10(R)ADLS,
BASE10(R)ADMS and BASE10(R)FS products. The timely delivery of product to
the Company's customers cannot be completely assured. The financial
statements at December 31, 1999 and for the year then ended reflect the
impact of the terminated contracts and delays in the delivery of
BASE10(R)ME and BASE10(R)CS.
The Company owns a minority interest in uPACs LLC ("the LLC") which
develops and markets an ultrasound picture archiving communications system
that digitizes, records and stores images on CD-ROM as an alternative to
film and video storage. In 1997, the Company formed the LLC with an
individual investor who is currently a principal stockholder of the
Company. 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. During 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. The Company ceased funding the LLC operation after the first
quarter of 2000. Costs of funding the LLC during the first quarter of 2000
totaled less than $50,000.
C. Summary of Significant Accounting Policies
- - - - ------------------------------------------------
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 all of the
risks inherent in a technology business, including but not limited to:
claims by customers for contractual or other unfulfilled commitments,
potential for significant technological changes in the industry or
customer requirements, potential for emergence of competitive products
with new capabilities or technologies, ability to manage future growth,
ability to attract and retain qualified employees, dependence on key
personnel, limited senior management resources, success of its research
and development, protection of intellectual property rights, potentially
long sales and implementation cycles, ongoing satisfaction of requirements
for continued listing of the Company's stock on the NASDAQ SmallCap Market
System and potential for Redemption events related to the Company's Series
B Redeemable Convertible Preferred Stock. (See Notes A and E to the
Consolidated Financial Statements).
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, reserves for claims by customers for contractual or other
unfulfilled commitments, the useful lives of capitalized computer software
costs and deferred tax asset valuation reserves. Actual costs and results
could differ from these estimates.
D. Acquisitions
- - - - ------------------
Almedica Technology Group Acquisition
On June 11, 1999, the Company acquired all of the outstanding stock of
Almedica Technology Group Inc., a wholly-owned subsidiary of Almedica
International, Inc. Simultaneous with the closing of the transaction, the
subsidiary, which develops and distributes clinical studies software for
the pharmaceutical industry, was renamed BTS Clinical, Inc. The stock of
the subsidiary was acquired in exchange for 3,950,000 shares of Class A
Common Stock (790,000 after adjustment for the September, 1999 reverse
stock split). At the time of the purchase, Class A Common Stock traded for
$.90625 per share ($4.53125 after adjustment for the September, 1999
reverse stock split).
This acquisition was accounted for by the purchase method of accounting.
The purchase price was allocated to the assets acquired based on their
estimated fair values. Management estimated the value of certain
intangible assets to be $4.1 million as of the purchase date. These assets
are included in other assets and are being amortized on a straight line
basis over their estimated lives of three to seven years.
Acquired Intangible Assets
Accumulated amortization related to the acquired intangibles at March 31,
2000 and December 31, 1999 was $1,994,000 and $1,606,000, respectively.
Included in acquired intangible assets is a Covenant Not to Compete with
the Company (the "covenant") signed by an executive who joined Base Ten as
part of the 1999 acquisition of BTS Clinical, Inc. The covenant covers the
period of the executive's employment with Base Ten plus two years
thereafter. The covenant was valued at $1.9 million at the time of the
acquisition and was being written off over four years, which management
estimated was the useful life of the agreement. The executive left the
employment of the Company as of March 31, 2000 and the covenant will be
amortized over its remaining contractual life.
E. Redeemable Convertible Preferred Stock
- - - - --------------------------------------------
On March 5, 1999, Series A Preferred Stock and warrants were exchanged for
approximately 15,203 shares of Series B Redeemable Convertible Preferred
Stock, $1.00 par value ("Series B Preferred Stock") with a principal
amount of approximately $15,203,000. In addition, 632,000 new warrants
(126,400 after adjustment for the reverse stock split) were issued to
Series B Preferred Stockholders, and 720,000 warrants (144,000 after
adjustment for the September 1999 reverse stock split) were issued to
replace certain warrants issued in December 1997. The Series B Preferred
Stock and warrants were recorded at March 31, 2000 and December 31, 1999
at their estimated fair value of $19,004,000.
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 ($20.00 after adjustment for the September 1999
reverse stock split), 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 (608,000 shares after adjustment for the September
1999 reverse stock split); (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 (608,000
shares after adjustment for the September 1999 reverse stock split); 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 ($20.00
after adjustment for the September 1999 reverse stock split).
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 the purchase price,
accrued but unpaid dividends and other contingent payments as provided
pursuant to the terms of the Series B 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. If the Company elects to settle the redemption in Class A Common
Stock the Mandatory Redemption Price is 1.25 times the purchase price. The
Company was accreting the carrying value of the Series B Preferred Stock
to the purchase price and recognizing the accretion charges to retained
earnings (accumulated deficit) over the period from issuance to maturity.
However, since the Company was below the $2 million minimum net tangible
assets, as defined, required for its current listing on the NASDAQ
SmallCap Market System at December 31, 1999 and remains below this
requirement for ongoing listing of its stock, the Company recorded the
Series B Redeemable Convertible Preferred Stock at its Redemption Price of
$19.0 million and recorded corresponding charges to net loss available for
common shareholders and accumulated deficit as of December 31, 1999.
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 the NASDAQ NMS or NASDAQ SmallCap Markets of the Class A
Common Stock for an aggregate of 30 trading days in any 18 month period;
(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 Class A 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 (which would approximate $19 million at
March 31, 2000 plus any other contingent payments which may become due) 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.
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).
Series B Preferred Stockholders 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 Series B
Preferred Stockholders on September 1, 1998 and thereafter converted at a
conversion price of $4.00 or more, the Series B Preferred Stockholders
received four-year warrants to purchase 80,000 shares (16,000 after
adjustment for the reverse stock split) of Class A Common Stock
exercisable at $3.00 ($15.00 after adjustment for the reverse stock split)
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 ($20.00
after adjustment for the reverse stock split) 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.
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>
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United States Europe Eliminations Consolidated
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Three Months Ended March 31, 2000:
Revenues from unaffiliated sources $ 634 $ 337 $ -- $ 971
- - - - ----------------------------------------------------- --------------- ------------------ ----------------- -------------------
Identifiable assets at March 31, 2000 $22,742 $ 856 $ (6,744) $ 16,854
- - - - ----------------------------------------------------- --------------- ------------------ ----------------- -------------------
- - - - ----------------------------------------------------- --------------- ------------------ ----------------- -------------------
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
- - - - ----------------------------------------------------- --------------- ------------------ ----------------- -------------------
</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.
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. 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 March 31, 2000. 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 as equals 5% of issued and
outstanding shares of common stock and common stock equivalents
immediately following and giving effect to any initial underwritten public
offering by Strategic, with respect to which there can be no assurance. 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 income in 1999 in the form of cash
payments of approximately $1.1 million which has been reflected as a gain
from sale of discontinued operations. 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.
The Company has subleased to Strategic approximately 30,000 square feet
plus allowed the use of 10,000 square feet of common areas for a period of
five years at an annual rental of $240,000 through 2000 and $264,000 per
year for 2001 and 2002.
H. 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):
<TABLE>
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- - - - -------------------------------------------------- ----------------- -------------------
Three Months Three Months
Ended Ended
March 31, 2000 March 31, 1999
- - - - -------------------------------------------------- ----------------- -------------------
<S> <C> <C>
Loss per common share-basic:
Net loss $ (2,604) $ (7,459)
Less: Dividends on Series A Preferred Stock -- (262)
Accretion on Series A Preferred Stock -- (282)
Credit on exchange of Redeemable
Convertible Preferred Stock -- 445
- - - - -------------------------------------------------- ----------------- ----------------
Net loss to common shareholders (numerator) $ (2,604) $ (7,558)
- - - - -------------------------------------------------- ----------------- ----------------
Weighted average shares - basic (denominator) 5,118,000 3,905,000
- - - - -------------------------------------------------- ----------------- ----------------
Net loss per common share-basic $ (0.51) $ (1.94)
- - - - -------------------------------------------------- ----------------- ----------------
Loss per common share-fully diluted:
Net loss $ (2,604) $ (7,459)
Less: Dividends on Series A Preferred Stock -- (262)
Accretion on Series A Preferred Stock -- (282)
Credit on exchange of Redeemable
Convertible Preferred Stock -- 445
- - - - -------------------------------------------------- ----------------- ----------------
Net loss to common shareholders (numerator) $ (2,604) $ (7,558)
- - - - -------------------------------------------------- ----------------- ----------------
Weighted average shares 5,118,000 3,905,000
Effect of dilutive options / warrants -- --
- - - - -------------------------------------------------- ----------------- ----------------
Weighted average shares-fully diluted (denominator) 5,118,000 3,905,000
- - - - -------------------------------------------------- ----------------- ----------------
Net loss per common share-diluted $ (0.51) $ (1.94)
- - - - -------------------------------------------------- ----------------- ----------------
</TABLE>
Stock options, warrants and rights would have an anti-dilutive effect on
earnings per share for the periods ended March 31, 2000 and 1999 and, therefore,
were not included in the calculation of fully diluted earnings per share.
<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, 1999, as
amended.
Three Months ended March 31, 2000 compared with Three Months ended March 31,
1999
- - - - --------------------------------------------------------------------------------
Continuing Operations
- - - - ---------------------
Revenues
- - - - --------
Company revenues decreased 42% to $1.0 million in the period ended March
31, 2000 as compared to $1.7 million in the period ended March 31, 1999.
Revenues for the 2000 period were derived 13% from software licenses and
enhancements, and 87% from services, installations and maintenance, compared to
revenues for the 1999 period which were derived 37% from software licenses and
enhancements and 63% from services, installations and maintenance. This decrease
was due primarily to ongoing delays during 2000 in the delivery of the Company's
BASE10(R)ME and BASE10(R)CS products.
Cost of Sales
- - - - -------------
Cost of sales, which includes amortization of software development costs
for PHARMASYST(TM) and BASE10(R)ME, decreased from $1.5 million in the period
ended March 31, 1999 to $1.1 million in the 2000 period. The decrease is
primarily due to lower amortization of capitalized software development costs in
2000 as a result of a write-off at December 31, 1999 of substantially all of the
capitalized development costs for PHARMASYST(TM) and BASE10(R)ME.
Research and Development Costs
- - - - ------------------------------
Research and development costs were approximately $0.5 million in both of
the quarters ended March 31, 1999 and 2000.
Sales and Marketing Expenses
- - - - ----------------------------
Company sales and marketing expenses decreased in the 2000 period to $0.7
million from $1.4 million in the quarter ended March 31, 1999. This decrease was
mainly due to decreases in human resource costs of $0.5 million, outside
consulting services of $0.1 million and travel expenses of $0.2 million.
General and Administrative Expenses
- - - - -----------------------------------
Company general and administrative expenses decreased in the 2000 period
to $1.2 million from $2.2 million in the comparable 1999 period. The decrease in
the 2000 period is primarily due to: (1) a reduction of $0.2 million of human
resource costs; (2) a reduction of $0.4 million in outside professional
services; (3) a reduction of $0.2 million of costs for funding the LLC ; and (4)
a reserve of $0.4 million recorded in 1999 against a loan receivable from Select
Software Tools. The reductions were partially offset by an increase of $0.2
million of depreciation charges related to assets acquired in June 1999 from
Almedica.
<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.
Other Expense
- - - - -------------
Other expense was approximately $0.1 million in both the quarter ended
March 31, 2000 and March 31, 1999.
Continuing Losses
- - - - -----------------
The Company incurred a net loss of $2.6 million in the quarter ended March
31, 2000, compared to a $7.5 million net loss for the quarter ended March 31,
1999. The decreased loss in the 2000 period was primarily due to reduced
expenses totaling $5.6 million in the quarter ended March 31, 2000, partially
offset by reduced revenues of $0.7 million. The expense reduction was primarily
attributed to the non-cash accounting charge of $3.5 million related to the
conversion of the $10 million debenture that took place in 1999 and lower
expenses in the quarter ended March 31, 2000 as compared to the quarter ended
March 31, 1999 of: (1) costs of revenues of $0.4 million; (2) sales and
marketing expenses of $0.8 million; and (3) general and administrative charges
of $1.0 million.
Liquidity and Capital Resources
- - - - -------------------------------
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. At March 31, 2000, the Company
was below certain criteria required for its current listing on the NASDAQ
SmallCap Market System, which could result in the Company's shares being
delisted from the NASDAQ SmallCap Market System. If the Company's Class A Common
Stock is suspended from trading or delisted for an aggregate of 30 trading days
in any 18 month period, or upon the occurrence of any other redemption event,
holders of the Company's Series B Redeemable Convertible Preferred Stock may
require the Company to redeem the Series B Redeemable Convertible Preferred
Stock for cash of 1.25 times the Mandatory Redemption Price, as defined in the
terms of the Series B Redeemable Convertible Preferred Stock. Such cash
redemption would aggregate at a minimum, $19 million, plus any other penalty
payments that may be due under the terms of the Series B Redeemable Convertible
Preferred Stock. (See Note E to the Consolidated Financial Statements.) The
Company does not currently have sufficient cash to pay such amounts should there
be a demand for payment. To increase the Company's net tangible assets, to help
ensure the Company's compliance with NASDAQ listing requirements and to enable
the Company to fund its operations through 2000, management is seeking the
infusion of additional capital financing. If such financing is obtained, then
management believes that the Company's liquidity would be sufficient to meet its
cash needs for its existing business through fiscal 2000. However, there can be
no assurance that management's efforts in this regard will be successful.
On May 11, 2000, the NASD notified the Company that it failed to meet the
NASDAQ SmallCap Market System continued listing criteria. The NASD specifically
inquired about the Company's ability to meet the NASDAQ SmallCap Market System
$2.0 million minimum net tangible asset requirement, the $35.0 million minimum
market capitalization requirement and its $0.5 million minimum net income
requirement. In order to facilitate the NASD's review of the Company's
eligibility for continued listing on the NASDAQ SmallCap Market System, the
Company must submit on or before May 25, 2000 its plan for achieving and
sustaining compliance with all of the listing criteria.
As discussed above, if certain Redemption events occur, the holders of the
Company's Series B Redeemable Convertible Preferred Stock have rights to require
the Company to purchase their shares for cash, which would severely adversely
affect the Company. (See Note L to the Consolidated Financial Statements.) The
redemption events include, but are not limited to, the Company's failure to
retain its ongoing listing on NASDAQ. If either no redemption event occurs, or
if the holders of the Company's Series B Redeemable Convertible Preferred Stock
elect not to exercise their redemption rights, then the Company may increase net
tangible assets in December 2000 by $19.0 million upon the conversion at
maturity of the Series B Redeemable Convertible Preferred Stock to Class A
Common Stock. However, there can be no assurance that the holders of the
Company's Series B Redeemable Convertible Preferred Stock will choose not to
exercise their redemption rights if a Redemption event occurs. Also, such
conversion of Series B Redeemable Convertible Preferred Stock to Class A Common
Stock will not provide the Company with any additional funds for operations.
The Company's working capital decreased from $3.8 million to $1.9 million
during the quarter ended March 31, 2000. The Company had $4.1 million of cash at
March 31, 2000 whereas the Company had $5.8 million of cash at December 31,
1999. The decrease in cash during the three months ended March 31, 2000 resulted
primarily from the use of cash in operations of $1.9 million.
Cash used in operations during 2000 has been affected primarily by the net
loss of $2.6 million and an increase in accounts receivable of $0.2 million.
These factors were partly offset by non-cash depreciation and amortization
charges of $0.6 million and an increase in total current liabilities of $0.4
million.
On March 5, 1999, the $10 million, 9.01% convertible debenture was
converted into 2,500,000 shares (500,000 after adjustment for the reverse stock
split) of Class A Common Stock, which increased shareholders' equity by
approximately $9.6 million, including a non-cash charge of approximately $3.5
million. As a result of these debenture conversions, the Company realized an
annual interest expense savings of approximately $1.3 million.
On March 5, 1999, the outstanding Series A Preferred Stock and warrants
were exchanged for Series B Redeemable Convertible Preferred Stock, $1.00 par
value ("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 (126,400 after adjustment for the reverse stock
split) were issued to Series B Preferred Stockholders, and 720,000 warrants
(144,000 after adjustment for the reverse stock split) were issued to replace
certain original warrants issued in December 1997. The Series B Preferred Stock
and warrants were recorded at December 31, 1999 at their estimated fair value of
$19,004,000. The difference between this estimated fair value and the carrying
value of the Series A Preferred Stock has been recorded as a debit to net loss
available to common shareholders and accumulated deficit.
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 ($20.00
after adjustment for the September 1999 reverse stock split), 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 (608,000 shares after adjustment for the
September 1999 reverse stock split); (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 (608,000 shares
after adjustment for the September 1999 reverse stock split); 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 ($20.00 after
adjustment for the September 1999 reverse stock split).
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 the purchase price, accrued but unpaid
dividends and other contingent payments as provided pursuant to the terms of the
Series B 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. If the Company elects to settle the
redemption in Class A Common Stock the Mandatory Redemption Price is 1.25 times
the purchase price. The Company was accreting the carrying value of the Series B
Preferred Stock to the purchase price and recognizing the accretion charges to
retained earnings (accumulated deficit) over the period from issuance to
maturity. However, since the Company was below certain criteria required for its
current listing on the NASDAQ SmallCap Market System at December 31, 1999 and
remains below these requirements for ongoing listing of its stock, the Company
has recorded the Series B Redeemable Convertible Preferred Stock at its
Redemption Price of $19.0 million and recorded corresponding charges to net loss
available for common shareholders and accumulated deficit as of December 31,
1999.
The Company is a 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 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, the operations of the LLC were funded by the Company
during the search for a buyer. As of March 31, 2000, the Company ceased funding
the LLC. Costs of funding the LLC during 2000 totaled less than $50,000. The
Company intends to either sell its interest in the LLC or abandon the efforts to
further develop its technology.
The Company is continually monitoring and 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 may result in certain nonrecurring
charges during 2000, but the extent of such charges is not yet quantifiable.
During 2000, contracts to provide software and services to certain
customers were terminated due to the Company's inability to meet delivery
deadlines for version 3.2 of BASE10(R)ME which was caused by the substantial
customization of the core product required for those projects. The termination
of those contracts will allow the Company to reallocate resources to other
projects requiring less substantial customization. To reduce its dependence on
the BASE10(R)ME and BASE10(R)CS products, the Company announced plans to more
aggressively market the BASE10(R)ADLS, BASE10(R)ADMS and BASE10(R)FS products.
The timely delivery of product to the Company's customers cannot be completely
assured. The financial statements at December 31, 1999 and for the year then
ended reflect the impact of the terminated contracts and concerns over the
delivery of BASE10(R)ME and BASE10(R)CS.
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 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 this business
discussion and in each case actual results may differ materially from such
forward looking statements. Successful marketing of BASE10(R)ME, BASE10(R)CS,
BASE10(R)FS, BASE10(R)ADLS and BASE10(R)ADMS 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.
<PAGE>
Part II. Other Information
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: May 15, 2000
Base Ten Systems, Inc.
(Registrant)
By: STEPHEN A. CLOUGHLEY
-------------------------------------------
Stephen A. Cloughley
President and Chief Executive Officer
(Principal Executive Officer)
By: WILLIAM F. HACKETT
-------------------------------------------
William F. Hackett
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Jan-01-2000
<PERIOD-END> Mar-31-2000
<EXCHANGE-RATE> 1
<CASH> 4,097,000
<SECURITIES> 70,000
<RECEIVABLES> 857,000
<ALLOWANCES> (66,000)
<INVENTORY> 0
<CURRENT-ASSETS> 6,018,000
<PP&E> 9,249,000
<DEPRECIATION> (4,953,000)
<TOTAL-ASSETS> 16,854,000
<CURRENT-LIABILITIES> 4,116,000
<BONDS> 0
19,004,000
0
<COMMON> 25,591,000
<OTHER-SE> (35,227,000)
<TOTAL-LIABILITY-AND-EQUITY> 16,854,000
<SALES> 971,000
<TOTAL-REVENUES> 971,000
<CGS> 1,134,000
<TOTAL-COSTS> 3,486,000
<OTHER-EXPENSES> (552,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 641,000
<INCOME-PRETAX> (2,604,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,604,000)
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<NET-INCOME> (2,604,000)
<EPS-BASIC> (0.51)
<EPS-DILUTED> (0.51)
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