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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999
Commission File No. 0-7100
BASE TEN SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
New Jersey 22-1804206
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Electronics Drive
Trenton, New Jersey 08619
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 586-7010
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Outstanding at
March 17, 2000
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Class A Common Stock 5,106,048
Class B Common Stock 9,450
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K under the Securities Exchange Act of 1934 is not contained
herein, and will not be contained, to the best of the Registrant's knowledge, in
definitive proxy or information statements incorporated in Part III of this Form
10-K or any amendments to this Form 10-K (X).
As of March 17, 2000, 5,106,048 shares of Class A Common Stock and 9,450 shares
of Class B Common Stock were outstanding, and the aggregate market value of
shares held by unaffiliated stockholders was approximately $16,650,000 and
$57,000, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Proxy Statement for the 2000 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Report.
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PART I
Item 1. Business
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Forward Looking Statement
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The following 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 throughout this annual report 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.
Overview
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Base Ten Systems, Inc. (the "Company" or "Base Ten") was founded in 1966
and became publicly traded in 1968. Through its earlier history, the Company's
focus was designing and producing products for defense and space programs
ranging from airborne telemetry installed in the Apollo spacecraft to high
performance weapons controllers used during operation Desert Storm through its
Government Technology Division ("GTD"). As the "cold war" came to an end,
management recognized that declines in U.S. and NATO spending required that Base
Ten develop commercial lines of business.
As an outgrowth of strategic planning work begun in 1990, management began
looking at new business lines leveraging its experience in developing safety
critical technology applications. With the promise of significant growth, the
pharmaceutical and medical device markets emerged as likely targets of
opportunity for the "new" Base Ten. Specifically, the development and marketing
of software solutions for the manufacture of products regulated by the Food and
Drug Administration ("FDA") addressed a totally unserved market niche. The
Company established the Medical Technology Division ("MTD") to address the
differing development, manufacturing, marketing, and sales needs of this
commercial sector.
Losses resulting from reduced revenues from the shrinking defense market
coupled with considerable product development and marketing expense in the MTD
produced increasing operating losses for Base Ten as a whole. In 1997, the
decision was reached to sell the defense related business and focus exclusively
on the opportunities offered in the FDA-regulated market. On December 31, 1997,
following shareholder approval, Base Ten completed the sale of the GTD to
Strategic Technology Systems, Inc. ("Strategic"). On January 29, 1998, the
Company elected to change its fiscal year to an accounting period January 1
through December 31.
Since the establishment of the MTD, Base Ten has been designing,
developing, and marketing comprehensive software solutions for regulated
manufacturing industries. Management focused on the Manufacturing Execution
Systems ("MES") markets, as it believes there is a strong potential for growth
over the next few years. Factors contributing to this decision include the
growing pressure on the Company's customer base to manage the costs of complying
with regulations promulgated by the FDA. In addition, our customers face
increasing competitive influences brought on by (a) recent business combinations
occurring in the customer market, and (b) the rise in purchasing power among
HMOs and other benefit programs, have underscored the need for manufacturers in
the industry to be even more cost efficient.
Base Ten's products are used in applications requiring consistent, highly
reliable outcomes where an out-of-specification event could have a catastrophic
result. The Company's first product was PHARMASYSTTM. It was a computerized MES
designed specifically for the FDA-regulated manufacturing industry. Based upon
the technology used in PHARMASYSTTM, the Company developed the BASE10(R)ME
product line (formerly known as PHARM2TM). The FlowStream product, a similar MES
offering, was purchased from Consilium, Inc., in February 1998, and renamed
BASE10(R)FS (refer to Note D to the Consolidated Financial Statements). The
clinical supplies market, a subset of the pharmaceutical manufacturing segment,
was identified as an attractive business opportunity. In September 1998, using
software similar to BASE10(R)ME, the Company introduced BASE10(R)CS. In
addition, the Company purchased Almedica Technology Group Inc., a wholly-owned
subsidiary of Almedica International, Inc. on June 11, 1999. Simultaneous with
the closing of the transaction, the subsidiary was renamed BTS Clinical, Inc.
Through this purchase, the Company acquired BASE10(R)ADLS and BASE10(R)ADMS,
formerly known as ADLS and ADMS, respectively, as additional offerings in its
suite of clinical supplies products.
1
BASE10(R)ME operates on a PC-based network using a distributed WindowsTM NT
client-server architecture. BASE10(R)FS uses a distributed HP-UX or Digital
VAX/VMS client-server architecture. They are both scalable and may be
implemented in a single operation, department, or across an entire enterprise.
The advantages of gradual integration are maximized user-level performance and
the ability to adjust quickly to ever-changing demands. An intuitive user
interface eases the task of data entry and retrieval with icons, selection
boxes, and an intelligent form designer. In addition, Base Ten's MES products
are designed and marketed as standard applications. Both MES products act as
electronic controls and monitors, ensuring that the production process complies
with a predefined set of specifications in order to produce a consistent
product.
BASE10(R)CS, a Clinical Supplies Materials Management System, is an analog
of BASE10(R)ME. It was designed for clinical supplies management and is based on
a distributed Windows NT client-server platform for application within high
volume clinical trials. BASE10(R)CS helps to ensure that a secure and steady
flow of the trial product is available for distribution. The effective
management of patient pack supply is critical for obtaining regulatory approval
as well as for meeting or exceeding time to market goals. BASE10(R)CS allows
rapid fulfillment of requests and full support of traceability requirements
while maintaining full compliance with FDA procedures. Historical operations
data is stored in a relational database, which can be readily accessed to
support a new drug application, real-time production analyses, and ultimately,
timely scale-up to commercial production.
As part of a strategic shift in focus to boost Base Ten's overall market
presence in the FDA-regulated industries, the Company will not issue a formal
release of version 3.2 of BASE10(R)ME or BASE10(R)CS. These products will be
available on a limited release basis for customers requiring customized
development.
BASE10(R)ADLS is designed to provide a windows-based, intuitive application
for clinical trial design, randomization and labeling for clinical trial
testing. The user is prompted through a set of screens designed to capture the
clinical study design and randomization data. A unique numbering convention is
applied to ensure traceability of all study materials. A fast and flexible label
design and generation capability is built into the application to ready the
study for distribution.
BASE10(R)ADMS is a distribution management system for the distribution of
clinical trials. The system maintains forward and backward traceability of all
trial materials throughout the life-cycle of the study. Features include: order
requests, pick tickets, shipment verification, order processing and reporting.
Through the automation of clinical trial design and distribution, users have the
tools necessary to increase throughput, increase quality and decrease the costs
associated with clinical trials.
The Company believes that BASE10(R)ME, BASE10(R)CS, BASE10(R)FS,
BASE10(R)ADLS and BASE10(R)ADMS address many of the unique challenges faced by
FDA-regulated industries. Many companies have difficulty managing, controlling,
and documenting the manufacturing process and pre-approved product testing
process, in real-time, while reducing costs, and remaining in compliance. Base
Ten's products offer state-of-the-art software solutions that reduce paperwork,
human error, and the time required to review, approve, and analyze batch
records. More importantly, since customers and prospects have indicated that
compliance with industry standards is imperative, efforts have been focused on
ensuring that the products and processes are also in compliance with the FDA
current Good Manufacturing Practice ("cGMP"), ISO 9000, and Generally Accepted
Manufacturing Practices ("GAMP").
To appreciate the advantages of Base Ten's products, it is important to
understand the functions that an MES is designed to perform. MES are software
programs designed to create conformity in a production sequence by defining the
elements of each production step. MES essentially institutes a checklist to be
followed, defining the raw material inputs, equipment operating instructions,
and procedures to be followed in order to maintain consistency in an end
product. Historically, manufacturers have used paper forms that follow a batch
through the production sequence, requiring signatures to verify that defined
procedures were followed. Paper-based processes are susceptible to human error,
leading to an increased possibility of corrupted batches. The production of
certain products effecting health and safety, such as pharmaceuticals and
consumer products, require greater production process control to decrease the
possibility of an adulterated end product. Paper based processes are also
expensive to manage.
Base Ten believes there is a compelling and immediate need for the
FDA-regulated manufacturing industries to implement MES that are cost effective,
flexible, and facilitate the demonstration of compliance with FDA cGMP
regulations.
Other Products
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Ultrasound Imaging Products. Base Ten introduced uPACS(TM), a system for
archiving ultrasound images, in 1994. The system digitizes records, and stores
ultrasound images on CD-ROMs as an alternative to existing film and video
storage systems. In April 1996, the Company determined that uPACS was not a
commercially viable product in its current state of development, despite the
fact that it expected to receive FDA clearance of a pre-market notification
application ("510(k) clearance"), which was ultimately granted in 1996.
2
The Company continued development efforts of uPACS(TM) and, in May 1997,
entered into an agreement whereby it became a minority owner of uPACS LLC, a
limited liability company (the "LLC"). Under the terms of the agreement, the
Company made a capital contribution to the LLC of its rights to its uPACS(TM)
technology. In exchange for such capital contribution, the Company received a 9%
interest in the LLC. A then outside investor, who is currently a principal
shareholder of the Company, made a total capital contribution of $3 million in
return for a 91% interest in the LLC. See Note M to the Consolidated Financial
Statements for further information on this arrangement. 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. For the year ended December 31, 1999, the Company paid approximately
$0.7 million of the LLC's expenses. The Company intends to continue funding the
LLC operation only through the first quarter of 2000. After that time,
management intends to either sell the LLC or abandon the efforts to further
develop its technology. Costs of funding the LLC after December 31, 1999 total
less than $50,000.
Government Technology Division
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On December 31, 1997, following shareholder approval, the Company completed
the sale of the GTD to Strategic. Strategic was a newly formed corporation
managed and partially owned by individuals who were, prior to the GTD Sale,
members of the Company's senior management (the "Management Group"). Members of
the Management Group were significantly involved in the business and development
of the GTD while employed by the Company and left the Company's employ to join
Strategic concurrently with the GTD Sale. Strategic acquired substantially all
of the net operating assets of the GTD in exchange for certain consideration,
pursuant to the terms and conditions set forth in an Asset Purchase Agreement
between the Company and Strategic dated October 27, 1997.
Sales and Marketing
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Base Ten's sales and marketing efforts are focused on MES and clinical
supplies materials management applications for the FDA-regulated industries. The
Company currently markets its products through a direct sales force in North
America and Europe. The sales staff is currently based domestically at Base
Ten's corporate headquarters in New Jersey, and abroad in England, France and
Belgium. The Company's sales force conducts presentations and demonstrations to
management and end users at the customer site as part of the direct sales
effort.
Base Ten supplements its direct sales efforts with a variety of marketing
initiatives including public relations activities, advertising in industry
periodicals, trade shows, industry symposiums and workshops, and user group
conferences. In addition, the Company's website is actively being used as a
sales and marketing tool. While the website is a valuable communications
conduit, it has also been useful in making initial Company and product
introductions to prospective customers. The website has also proven to be an
effective and efficient tool for presenting annotated product demos for
potential customers.
Research and Development
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Base Ten's research and development efforts are currently directed at
evolving its existing products into a web-based architecture.
In fiscal years 1997, 1998 and 1999, Base Ten expensed approximately $0.1
million, $2.0 million and $1.2 million, respectively, in research and
development expenditures. The development staff consists of approximately 15
software engineers supported by test, project, quality and administrative staff.
Competition
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The Company competes in the MES and Clinical Supplies software markets.
Base Ten faces three major sources of competition: paper-based systems,
commercial vendors of software products that develop one or more elements for
pharmaceutical manufacturing, and in-house computer programs.
The Company's main competitors include POMS, ProPack GmbH and Werum AG.
Several of the competitors offer products that are either toolkits, requiring
significant customization or provide only specific pieces of MES applications,
and/or focus on other vertical markets. The Company feels that it gains a
competitive advantage by staying focused on the FDA-regulated vertical
industries and by its continued development of functionality and support for the
evolving Clinical Supplies business.
Base Ten believes that internal Information System departments provide a
source of competition for product sales. In addition, the Company competes with
system integrators who develop custom solutions.
Competition among providers of software for manufacturers is likely to
increase as the industry starts to focus on productivity improvement and
compliance with 21 CFR Part 11, under which the FDA regulates the use of
electronic signatures and records during the manufacturing process. However,
Base Ten's premier client base and well-established domain knowledge should
provide effective barriers to the newer entrants.
3
Despite the Company's belief that it ranks ahead of the known competition
in suitability for FDA-regulated manufacturing, there can be no assurance that
it will compete successfully with new or existing competitors or that
competitive pressures faced by Base Ten will not materially and adversely affect
its business and financial results.
Proprietary Rights
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While the Company has received certain patent protection for its Base Ten
products, there can be no assurances that any additional patents will be issued,
that the scope of any patent protection will be adequate, or that any current or
future issued patents will be held valid if challenged. The Company believes
that its products and technology do not infringe upon any existing proprietary
rights of others.
The Company regards its software as proprietary and attempts to protect it
with copyrights, trademarks, trade secret law, and contractual arrangements.
However, existing copyright laws offer only limited practical protection for
software. Furthermore, the laws of some foreign countries do not protect
proprietary rights to the same extent as do the laws of the United States. There
can be no assurance that the means of protecting the Company's proprietary
software will be adequate or that competitors will not independently develop
technologies similar to that of the Company.
Under certain circumstances, customers of Base Ten may be entitled to
limited access of the source code. Customer access to source code may increase
the possibility of misappropriation of the product or other misuses of Base
Ten's software. Accordingly, it may be possible for unauthorized third parties
to copy certain portions of Base Ten's software or to obtain and use information
that the Company regards as proprietary. In addition, the Company has filed
applications for a patent covering certain aspects of the safety critical
technology.
Regulation
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Base Ten's software products do not require pre-marketing FDA clearance or
approval. However, those products are intended to facilitate compliance by
pharmaceutical manufacturers with FDA cGMP and are designed to be integrated
into a manufacturer's production systems. A pharmaceutical manufacturer's
systems, including any BASE10(R)ME, BASE10(R)FS, and BASE10(R)CS application,
must be capable of sufficiently documenting the production of each batch of
product to be in compliance with cGMP. Further, the manufacturer must be able to
demonstrate to the FDA that its systems have that capability under a variety of
circumstances. Base Ten is engaged in a continuous program to maintain
compliance with GAMP.
Other products Base Ten has developed are considered, and the archiving
software for ultrasound images that the Company is supporting will be
considered, "medical devices" under FDA regulations. Before such products may be
marketed in the U.S., they must receive 510(k) clearance or FDA clearance of a
pre-market approval application ("PMA"). Obtaining such clearance can take
substantial time and can require substantial expenditures. Many other countries
regulate the manufacture, marketing and use of medical devices in ways similar
to the U.S. There can be no assurance that Base Ten will be able to obtain
required clearances for any products it develops on a timely or cost-effective
basis, if at all.
Employees
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The Company currently employs a total work force of 71 persons, including
45 engineers. None of the Company's employees are covered by collective
bargaining agreements. The Company has never experienced any labor disruptions
or work stoppages and considers its employee relations to be good.
Product Liability Insurance
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Base Ten maintains product liability insurance of at least $5 million for
its products in the event a claim is made that the Company's products failed to
prevent defects in pharmaceutical products which resulted in injury to
consumers. There can be no assurances that the Company's existing insurance
would be adequate to cover any claims or that the Company will be able to obtain
and maintain adequate insurance in the future. The Company and Strategic agreed
to each obtain insurance protecting the other from liabilities that could occur
because of defense products now in the field manufactured by the GTD while part
of the Company.
Foreign Operations
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Information on operations in different geographic areas is provided in Note
J to the Consolidated Financial Statements.
4
Executive Officers of the Company
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The current executive officers of the Company are as follows:
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Name Age Offices Held with Base Ten Period Served
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Robert Hurwitz 56 Chairman of the Board 1999 to present
Stephen A. Cloughley 39 Chief Executive Officer and President 1999 to present
(and director since April 11, 2000)
William F. Hackett 49 Senior Vice President, Chief Financial
Officer and Secretary 1997 to present
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A summary of the business experience and background of the Company's
officers is set forth below.
Mr. Hurwitz was elected a director of the Company in May 1999. In November
1999, Mr. Hurwitz was appointed Chairman of the Board. From 1994 to 1999 Mr.
Hurwitz was chairman and co-founder of HomePlace Stores, Inc., which is
wholly-owned by HomePlace Holdings, Inc., of which Mr. Hurwitz was the chairman
and chief executive officer. In January 1998, HomePlace Holdings, Inc. filed a
voluntary petition in bankruptcy under Chapter 11 of the United States
Bankruptcy Act. From 1998 to 1994, Mr. Hurwitz was the chairman and co-founder
of OfficeMax, Inc. Prior to 1988, Mr. Hurwitz served as chairman and chief
executive officer of Professional Housewares Distributors, Inc., which he
co-founded in 1977. Mr. Hurwitz has also been a general partner and a director
of Coral Company, Inc., a real estate development company, since 1987.
Mr. Cloughley joined the Company in February 1994 as head of sales for
European operations. In 1996, Mr. Cloughley relocated to the corporate offices
in Trenton where he served as Senior Vice President responsible for corporate
strategy and marketing. Mr. Cloughley left the Company in April 1999 but
rejoined Base Ten as President and Chief Executive Officer of the Company in
November 1999. Mr. Cloughly was elected as a director, to fill a vacancy, on
April 11, 2000.
Mr. Hackett joined the Company in December 1997 and serves as Chief
Financial Officer and Senior Vice President of Human Resources and Corporate
Strategy. Prior to joining the Company, Mr. Hackett served as Senior Manager for
the Princeton Data Division of Bloomberg Financial Markets from 1991 to 1997 and
was responsible for the collection, analysis, and distribution of information
and product development.
Item 2. Properties
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The Company's principal office in the United States is in Trenton, New
Jersey. Base Ten leases an 82,000 square foot facility, which houses its
corporate headquarters and development and support activities. The lease for the
building expires in October 2009. Base Ten occupies approximately 42,000 square
feet of this property. Strategic occupies the remaining approximately 40,000
square feet, pursuant to a five-year sublease with the Company expiring in 2002.
Base Ten also leases approximately 7,200 square feet of space at its European,
Middle East, and African headquarters in Mechelen, Belgium. The lease for the
office space in Mechelen expires in 2008. In addition, the Company leases office
facilities in the United States in Parsippany, New Jersey and Santa Clara,
California, as well as internationally in Camberley, England. The Company is
currently working to dispose of the Parsippany and Camberley leases.
Management believes that the Company's facilities are currently adequate
for its operations.
Item 3. Legal Proceedings
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The Company is involved from time to time in various claims and proceedings
including customer and employee claims in the normal course of business. The
Company has certain agreements with some of its customers which contain damage
or penalty clauses for non-delivery or delays beyond certain dates. Such damage
clauses vary by customer and may provide for a fixed amount of damages per day
or per week, and may or may not contain limitations on the aggregate amount of
such damage payments. At December 31, 1999, the Company has missed certain
delivery dates which provide, in one case, for the possible imposition of
payments by the Company of $10,000 per week. Management has maintained
discussions with its customers in an effort to satisfy customers' requirements
while minimizing exposure to damage claims. The Company has reserved
approximately $500,000 for such matters at December 31, 1999. While management
believes this amount is sufficient to cover all damage claims, if any, it is
possible that customer claims may exceed this amount and such additional amounts
could be material to the Company's financial position and statement of
operations when such amounts are finally determined.
5
Item 4. Submission of Matters to a Vote of Security Holders
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No matters were submitted to a vote of the security holders during the
fourth quarter of the fiscal year ended December 31, 1999.
6
PART II
Item 5. Market for the Company's Common Stock and Related Shareholder Matters
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On May 14, 1999, the NASD notified the Company that it intended to delist
the Class A Common Stock from NASDAQ NMS because the NASD believed that the
Company had failed to meet the NASDAQ NMS continued listing criteria. The NASD
specifically inquired about the Company's ability to meet the NASDAQ NMS net
tangible asset requirement and its minimum bid requirement. In response to a
hearing before the NASD in which the Company appealed the NASD's determination,
the listing of the Company's Class A Common Stock was transferred to the NASDAQ
SmallCap Market, effective September 10, 1999. In addition, the Company executed
a one-for-five reverse stock split on September 24, 1999 in order to comply with
the NASD's $1.00 minimum bid price requirements. The Company's Class A Common
Stock is listed on the NASDAQ SmallCap Market under the trading symbol "BASEA".
At December 31, 1999, the Company's net tangible assets were below that required
for continued listing on the NASDAQ SmallCap Market. See Note A to the
Consolidated Financial Statements.
The Company's Class B Common Stock, which traded under the symbol "BASEB",
was delisted from the NASDAQ SmallCap Market in the second quarter of 1998. The
Company also executed a one-for-five reverse stock split of Class B Common Stock
effective, for business purposes, September 24, 1999. See Note N to the
Consolidated Financial Statements.
The table below sets forth the high and low sale prices of the Company's
Class A Common Stock and Class B Common Stock as reported by NASDAQ for the
periods indicated, after adjustment for the one-for-five reverse stock split.
The OTC market quotations reflect inter-dealer prices, retail mark-up, mark-down
or commission and may not necessarily represent actual transactions; thus, the
listing of sales prices for Class B Common Stock after delisting from the NASDAQ
SmallCap Market in 1998 is not applicable, as denoted in the chart below.
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Class A Common Stock Class B Common Stock
Bid Price Bid Price
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High Low High Low
---- --- ---- ---
Fiscal 1998:
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First quarter....................... $ 52 1/2 $ 25 $ 52 1/2 $ 35
Second quarter...................... 33 1/8 10 5/16 39 3/8 35 5/8
Third quarter....................... 25 15/16 7 13/16 N/A N/A
Fourth quarter...................... 20 9 11/16 N/A N/A
Fiscal 1999:
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First quarter....................... $ 16 1/4 $ 5 5/8 N/A N/A
Second quarter...................... 10 5/8 2 1/2 N/A N/A
Third quarter....................... 5 5/16 1 1/2 N/A N/A
Fourth quarter...................... 6 1/2 5/8 N/A N/A
As of March 17, 2000, there were approximately 697 record holders of Class
A Common Stock and 108 record holders of Class B Common Stock.
Base Ten has not paid cash dividends on its Common Stock since 1985. The
present policy of the Board of Directors is to retain any future earnings to
provide for the Company's growth.
7
Item 6. Selected Financial Data
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The following table presents selected financial data for Base Ten and its
consolidated subsidiaries. The selected consolidated financial data for the
fiscal years ended December 31, 1999, December 31, 1998, and October 31, 1997
the two month period ended December 31, 1997 have been derived from the
Company's audited Consolidated Financial Statements included elsewhere in this
Report and should be read in conjunction with those Consolidated Financial
Statements and related Notes. The selected consolidated financial data for the
fiscal years ended October 31, 1996 and October 31, 1995 have been derived from
our audited consolidated financial statements that do not appear in this report.
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Base Ten Systems, Inc. and Subsidiaries
(dollars in thousands except per share data)
------------------------------------------ -------------- -------------- ------------- -------------- ------------- --------------
Two-Months
Year Ended Year Ended Ended Year Ended Year Ended Year Ended
Dec 31, 1999 Dec 31, 1998 Dec 31, 1997 Oct 31, 1997 Oct 31, 1996 Oct 31, 1995
------------------------------------------ -------------- -------------- ------------- -------------- ------------- --------------
Summary of Operations:
Revenues $ 4,364 $ 7,550 $ 181 $ 2,512 $ 1,262 $ 2,710
Loss from continuing operations before
income tax benefit(1) (2) $ (21,326) $ (19,020) $ (3,714) $ (15,980) $ (9,097) $ (2,616)
Income taxes (benefit) $ -- $ -- $ -- $ -- $ (684) $ (707)
Net loss from continuing operations $ (21,326) $ (19,020) $ (3,714) $ (15,980) $ (8,413) $ (1,909)
Net earnings (loss) from discontinued $ 1,086 $ -- $ (222) $ (6,027) $ (546) $ 532
operations
Net earnings (loss) $ (20,240) $ (19,020) $ (3,936) $ (22,007) $ (8,959) $ (1,377)
------------------------------------------ -------------- -------------- ------------- -------------- ------------- --------------
Net earnings (loss) per common share
from: (5)
Continuing operations $ (6.07) $ (10.45) $ (2.25) $ (10.12) $ (5.45) $ (1.40)
Discontinued operations $ .23 $ -- $ (.13) $ ( 3.82) $ (.35) $ .40
------------------------------------------ -------------- -------------- ------------- -------------- ------------- --------------
Net earnings (loss) per share $ (5.84) $ (10.45) $ (2.38) $ (13.94) $ (5.80) $ (1.00)
------------------------------------------ -------------- -------------- ------------- -------------- ------------- --------------
Summary Balance Sheet
------------------------------------------ -------------- -------------- ------------- -------------- ------------- --------------
As of : Dec 31, 1999 Dec 31, 1998 Dec 31, 1997 Oct 31, 1997 Oct 31, 1996 Oct 31, 1995
------------------------------------------ -------------- -------------- ------------- -------------- ------------- --------------
Working capital (3) $ 3,827 $ 15,482 $ 6,080 $ 2,671 $ 14,115 $ 13,270
Total assets $ 19,077 $ 33,821 $ 24,413 $ 21,217 $ 30,397 $ 28,005
Long term debt, net of current $ 3,204 $ 13,341 $ 18,916 $ 18,925 $ 13,478 $ 3,525
maturities (4)
Redeemable Preferred Stock $ 19,004 $ 12,914 $ 6,155 $ -- $ -- $ --
Shareholders' equity (deficit) $ (7,019) $ 2,372 $ (6,054) $ (4,982) $ 12,140 $ 20,261
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(1) Included in financial data are write-offs of capitalized software
costs of $1.2 million and $2.4 million in 1999 and 1996,
respectively.
(2) Included in fiscal year October 31, 1997 financial data is the $2.7
million of expense relating to fair market value of options and
warrants issued to non-employee consultants (see discussion in
Results of Operations - Continuing Operations).
(3) Included in fiscal 1997 is the reclassification of the assets and
liabilities of GTD as net assets held for sale.
(4) Included in 1995 to 1999 financial information is a long-term
financing obligation.
(5) Adjusted in 1995 to 1998 to reflect the 1999 one-for-five reverse
stock split.
8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
-------------
General
- -------
On December 31, 1997, following approval by the shareholders, the Company
sold the GTD (the "GTD Sale") to Strategic Technology Systems, Inc. , as
discussed in Item 1 hereof. On January 29, 1998, the Company elected to change
its fiscal year to an accounting period from January 1 through December 31. This
Annual Report on Form 10-K, for the fiscal year ended December 31, 1999, does
not include, except as indicated herein, the operations of the GTD.
The Company's initial MES product was PHARMASYST(TM), which was introduced
in 1993. Utilizing the PHARMASYST(TM) technology, the Company developed and
released the BASE10(R)ME product line. In June 1998, Base Ten released
BASE10(R)ME version 2.3. The Company followed in September 1998 with the release
of BASE10(R)CS, which is an analog of BASE10(R)ME, designed for pre-approval
product testing. As a result of the February 1998 purchase of assets from
Consilium, Inc., the Company acquired the rights to develop, distribute and
support the FlowStream product, which is now known as BASE10(R)FS.
In June 1999, the Company purchased all of the outstanding shares of the
Almedica Technology Group, Inc. from Almedica International, Inc., renaming the
group BTS Clinical, Inc. The Company acquired the BASE10(R)ADLS and
BASE10(R)ADMS products through this acquisition. Refer to Note D to the
Consolidated Financial Statements and the "Continuing Operations Overview" below
for more information about this acquisition.
Cost Reduction Measures
- -----------------------
As a result of the purchase of BTS Clinical, Inc. in June 1999, the Company
experienced an increase in total personnel of approximately 25 employees,
bringing the total for Base Ten to approximately 120 employees as of the
acquisition date. Since the acquisition of BTS Clinical, Inc., the Company
eliminated approximately 45 positions through a staff reduction plan and
attrition. This decrease in staff subsequent to the BTS Clinical, Inc.
acquisition should result in a reduction in the Company's compensation and other
related costs of approximately $4 million per year.
Discontinued Operations
- -----------------------
The consolidated financial statements of the Company account for the
operations of the GTD as discontinued operations in view of the GTD Sale, as
discussed in Item 1 hereof. In the financial statements, all items of income and
expense attributable to GTD's operations for all periods presented are
separately identified as gain or loss from discontinued operations. Accordingly,
the following discussion of the Company's financial condition and the results of
operations excludes the results of the discontinued operations, except as
otherwise indicated.
Continuing Operations Overview
- ------------------------------
Since 1991, Base Ten, through its then existing Medical Technology
Division, has been engaged in the design, development, and marketing of
comprehensive software solutions for the regulated manufacturing industries, and
most recently, computerized manufacturing execution systems for the
pharmaceutical and medical device industries. Management believes that the
demand for MES in these markets is poised for significant growth over the next
few years due to several factors. One factor is the growing pressure on the
Company's customer base to comply with regulations promulgated by the FDA, ISO
9000, and other industry standards such as GAMP. In addition, increasing
competitive influences brought on by (a) recent business combinations occurring
in the customer market, and (b) the rise in purchasing power among HMOs and
other benefit programs, have underscored the need for manufacturers to increase
cost efficiency.
The Company's acquisition of certain assets from Consilium, Inc. in
February 1998 broadened the Company's reach into these industries with the
addition of the FlowStream product (BASE10(R)FS) a UNIX-based MES targeted at
pharmaceutical, medical device and specialty chemical customers. The June 1999
acquisition of BTS Clinical, Inc. enabled the Company to expand its offering of
clinical supply chain product with the addition of BASE10(R)ADLS, a drug
labeling and materials management system, and BASE10(R)ADMS, a distribution
management system.
The Company believes that its products are premier, standardized PC-based
systems running on Microsoft Windows-NT (BASE10(R)ME, BASE10(R)CS, BASE10(R)ADLS
and BASE10(R)ADMS) and HP-UX or Digital VAX/VMS (BASE10(R)FS) with requisite
functionality and documented support required by the pharmaceutical and medical
device industries to assist in reducing costs while remaining FDA, ISO 9000, and
GAMP compliant. The Company will continue to pursue a leadership position in
this market, primarily through its BASE10(R)FS product.
9
The Company has received indications from customers and prospects that
compliance with industry standards is imperative to sales. As such, efforts have
been focused on compliance with certain industry standards and the Company
believes that both BASE10(R)ME and BASE10(R)FS are compliant with FDA, ISO 9000,
and GAMP. As described above, there is a need for pharmaceutical and medical
device manufacturers to have MES products compliant with cGMP. The Company
considers the additional costs of compliance with ISO 9000 and GAMP to be
prudent investments.
Personnel are in place to address product development and enhancement,
sales and marketing, and customer support. Management believes absorbing these
expenses in advance of revenue generation is essential to facilitating market
emergence and near term growth of the Company.
For use in a manufacturing environment, a system generally has to undergo
validation in accordance with defined procedures determining its fitness for use
in a regulated environment. While Base Ten has continued to provide a migration
path for many of its product offerings, validation requires that project
implementation be documented and tested as a complete, installed system.
Projects based upon BASE10(R)ME and BASE10(R)CS are implemented using its core
functionality and are then configured, customized, documented, and tested to
meet the overall requirements of the particular program. This approach
drastically reduces the need to include an extensive list of special functions
in the core product. The core BASE10(R)ME and BASE10(R)CS product release has
matured to include many of the functional requirements as represented by a large
cross-section of our customer base. Version 3.2 of BASE10(R)ME and BASE10(R)CS
will not result in a formal release but will result in a set of components to be
configured and customized to meet the goals of a particular customer
application.
Subsequent to December 31, 1999, a contract to provide software and
services to one customer was 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 the project. Under
the terms of this contract, the Company was to receive revenues totaling
approximately $1.4 million. The termination of this contract 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 plans to more aggressively market the BASE10(R)ADLS, BASE10(R)ADMS and
BASE10(R)FS products. While the timely delivery of product to the Company's
customers cannot be completely assured, management believes the Company will be
able to meet its remaining delivery commitments. The financial statements of the
Company have been adjusted as of December 31, 1999 and for the year then ended
to reflect the impact of the terminated contract and concerns over the delivery
of BASE10(R)ME and BASE10(R)CS.
Results of Discontinued Operations
- ----------------------------------
As discussed above, the GTD was sold to Strategic on December 31, 1997, and
as such, its results of operations are not included in the Company's results of
operations for fiscal years 1998 and 1999. During 1999, Strategic was sold to
Smiths Industries ("Smiths"), a defense industry competitor. The Company,
pursuant to the terms of the agreement to sell the GTD, received approximately
$1.1 million in 1999, which has been reflected as a gain from sale of
discontinued operations.
Fiscal 1999 Compared to Fiscal 1998
- -----------------------------------
Continuing Operations
---------------------
Revenues
--------
Company revenues decreased to $4.4 million in 1999 from $7.5 million in
1998. Of this decrease, $1.5 million is due to a decrease in license and related
revenues, and $1.7 million is attributable to a decrease in service and
maintenance revenues. The decreases in both license revenues and services were
due in part to delays in successful development of version 3.2 of BASE10(R)ME as
well as customers' concerns over Year 2000 corporate issues. Revenues for 1999
were derived 29% from licenses and related revenues and 71% from service and
related revenues, as compared to 1998, when revenue was derived 36% from
licenses and related revenues and 64% from service and related revenues.
10
Cost of Revenues
----------------
Cost of revenues in 1999 was $7.0 million compared with $9.6 million in
1998. Cost of revenues decreased primarily as a result of a reduction in
headcount and outsourced labor. In 1999, the Company incurred an unusual
non-cash charge of $1.2 million for accelerated amortization of software
development costs capitalized prior to 1999 that were determined in the fourth
quarter of 1999 to be greater than net realizable value.
Research and Development Costs
------------------------------
Research and development costs decreased in 1999 to $1.2 million from $2.0
million in 1998. This decrease was due to the reduction of headcount in 1999.
Sales and Marketing Expenses
----------------------------
The Company's sales and marketing expenses increased in 1999 to $6.3
million compared with $5.0 million in 1998. The increase was mainly attributable
to the hiring of additional sales personnel which increased salary and related
expenses.
General and Administrative Expenses
-----------------------------------
Company general and administrative expenses decreased to $7.8 million in
1999 from $8.9 million in 1998. Decrease is primarily due to a reduction of $1.2
million in outside consulting costs, partially offset by an increase of $0.7
million in costs of funding the LLC.
Other Income and Expense
------------------------
Other income and expense improved from a loss of $1.0 million in 1998 to a
gain of $0.2 million in 1999. Interest expense decreased by $0.9 million in 1999
as a result of the conversion in March of debt securities for Class A Common
Stock. Interest income increased in the 1999 period as a result of higher cash
balances available to earn interest.
Continuing Losses
-----------------
The Company incurred a net loss from continuing operations of $21.3 million
in 1999 compared to a $19.0 million net loss from continuing operations in 1998.
The Company's increased loss in 1999 was primarily due to (a) the $2.6 million
reduction in revenues which was caused by delays in the development and release
of BASE10(R)ME software and customer concerns over Year 2000 issues, (b) a $3.5
million unusual non-cash charge associated with the conversion of debt to
equity, and (c) a $1.2 million unusual non-cash charge for the write-off of
capitalized software development costs. These factors were partially offset by
decreases in: headcount, certain outside professional and consulting services,
and interest expense due to the conversion of long term debt to equity.
Fiscal 1998 Compared to Fiscal 1997
- -----------------------------------
Continuing Operations
---------------------
Revenues
--------
Company revenues increased to $7.6 million in 1998 from $2.5 million in
1997. The increase is due to an increase in license and related revenues of $1.5
million, and service and maintenance revenues of $3.5 million. Revenues for 1998
were derived 36% from licenses and related revenues, and 64% from service and
related revenues, as compared to 1997 when revenue was derived 49% from licenses
and related revenues and 51% from service and related revenues. Revenues from
FlowStream licenses, services and maintenance during 1998 accounted for $2.7
million of the $5.1 million increase in 1998.
Cost of Revenues
----------------
Cost of revenues in 1998 was $9.6 million compared with $6.4 million in
1997. Cost of revenues increased as a result of increased sales of the Company's
MES products and increased labor charges associated with the Company's increased
service and maintenance related revenues. These increased costs were partly
offset by decreased amortization of software development costs for
PHARMASYST(TM) and BASE10(R)ME of $2.6 million in 1998 from $3.0 million in
1997.
11
Research and Development Costs
------------------------------
Research and development costs increased significantly in 1998 to $2.0
million from $0.1 million in 1997. This increase relates to additional personnel
and related expenses being dedicated to developing future versions of the
Company's products.
Sales and Marketing Expenses
----------------------------
The Company's sales and marketing expenses increased significantly in 1998
to $5.0 million compared with $2.7 million in 1997. The increase was mainly
attributable to 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 to $8.9 million in
1998 from $7.7 million in 1997. Costs rose primarily as a result of increases in
administrative salary and related expenses, legal, professional and consulting
fees and integration costs related to the addition of the FlowStream product
line. These increases were partly offset by a decrease of $2.4 million expense
related to the fair market value of options and warrants issued to non-employee
consultants for services rendered during 1997. The fair market value in each
year was determined using the Black-Scholes option pricing model.
Other Income and Expense
------------------------
Other expense decreased from $1.5 million in 1997 to $1.0 million in 1998.
In 1998, other expense is primarily comprised of interest expense of $1.6
million, partially offset by $0.5 million of interest income and $0.1 million of
other income. In the 1997 period, other expense was comprised of $1.6 million of
interest expense, partially offset by $0.1 million of interest income. Interest
expense remained consistent in the 1998 period as a result of similar average
levels of debt. Interest income increased in the 1998 period as a result of
higher cash balances available to earn interest. Other income increased in the
1998 period largely due to rental income earned on the sublease of building
space to Strategic, which was not present in this 1997 period, partially offset
by foreign currency exchange losses.
Continuing Losses
-----------------
The Company incurred a net loss from continuing operations of $19.0 million
in 1998 compared to a $16.0 million net loss from continuing operations in 1997.
The increased loss in 1998 was largely attributable to increases in: headcount
and related expenses, legal, professional and consulting fees and integration
costs related to the addition of the FlowStream product. These increases were
partly offset by a decrease of $2.4 million expense related to the fair market
value of options and warrants issued to non-employee consultants for services
rendered during 1997.
Readiness for the Year 2000
- ---------------------------
Year 2000 Issues
----------------
Historically, software, and other equipment included programming code in
which calendar year data was abbreviated to only two digits. As a result of this
design decision, some of these systems were at risk of failing to operate or
failing to produce correct results if "00" was interpreted to mean 1900, rather
than 2000. The Company, in anticipating the year 2000, kept the potential for
this problem (the "Y2K Problem") in mind when purchasing new computers, software
and equipment during the two years prior to December 31, 1999. The Company also
considered the Y2K Problem when developing new products for sale to customers.
Company Readiness. During 1998, the Company formed an internal Y2K
committee whose goal was to minimize any disruptions of the Company's business
and to limit the Company's liabilities resulting from the Y2K Problem. As a
result, throughout 1998 and 1999, the Company 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 were Y2K compliant.
In 1998, the Company replaced its existing financial accounting software system,
which the Company deemed to be a business-critical system, with a system which
is vendor-certified as being Y2K compliant. The Company also reviewed all of the
computers, major software applications, and related equipment used in connection
with its internal operations to ensure that the possibility of a material
disruption to its business was minimized. All hardware or software systems that
were not Y2K compliant were either replaced or remediated. In addition, the risk
of business interruption resulting from the failure of office and facilities
equipment, such as fax machines, photocopiers, telephone switches, security
systems, and other common devices was assessed and deemed to be minimal.
12
Software Sold to Customers. The Company believes that it substantially
identified and resolved all potential Y2K Problems with its MES software, as
well as with version 3.4 and later versions of BASE10(R)FS. However, management
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 the complexity of these products and the fact that these
products interact with other third party vendor products and operate on computer
systems which are not under the Company's control.
Certain customers have earlier versions of the Company's MES software,
PHARM2(TM) (prior to version 2.3) and PHARMASYST(R) 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 were notified of the Company's willingness and ability to provide Y2K
test specifications and/or assistance for a fee. The number of customers that
still operate these earlier versions is small, 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.
Costs of Compliance. The Company noted no failure of internal equipment or
systems due to Y2K Problems after December 31, 1999. No Y2K Problems were
reported by customers using the Company's software. Accordingly, the Company
does not anticipate that the cost of unforeseen Y2K Problems, if any, will have
a material adverse affect on its operations.
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 December 31, 1999, the
Company was below the $2 million minimum net tangible assets 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, as defined in the terms of the Series B Convertible
Preferred Stock, holders of the Company's Series B Convertible Preferred Stock
may require the Company to redeem the Series B Convertible Preferred Stock for
cash of 1.25 times the Mandatory Redemption Price. 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 Convertible Preferred Stock. (See Note L 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
further increase the Company's net tangible assets and in order to ensure the
Company's compliance with NASDAQ listing requirements, management is seeking the
infusion of additional capital financing or investment from a strategic
investor. 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.
As discussed above, if certain Redemption Events occur, the holders of the
Company's Series B 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 the NASDAQ SmallCap Market System. If no
Redemption Event occurs, or if the holders of the Company's Series B 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 Convertible Preferred Stock to Class A
Common Stock. However, there can be no assurance that the holders of the
Company's Series B Convertible Preferred Stock will choose not to exercise their
redemption rights if a Redemption Event occurs. Such conversion of Series B
Convertible Preferred Stock to Class A Common Stock will not provide the Company
with any additional funds for operations.
13
Company working capital decreased to $3.8 million at fiscal year end
December 31, 1999 from $15.5 million at December 31, 1998. The Company had $5.8
million of cash and cash equivalents at December 31, 1999, down from $17.4
million at December 31, 1998. The decrease in cash during the fiscal year ended
December 31, 1999 resulted primarily from the use of cash in operations of $12.6
million partially offset by the receipt of $1.1 million related to the sale of
Strategic to Smiths Industries.
In 1999, cash used in operations has been affected primarily by the net
loss of $20.2 million and a reduction of $2.3 million in accounts payable,
accrued expenses and deferred revenue. The net loss includes certain non-cash
charges such as amortization and depreciation of $4.8 million and the non-cash
debt conversion charge of $3.5 million. The decrease in accounts receivable
provided $1.8 million for operations.
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. For further
discussion of these debentures see Note L to the Consolidated Financial
Statements.
On March 5, 1999, the outstanding Series A Preferred Stock and warrants were
exchanged for Series B 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. Since the Company was below the $2 million minimum net tangible assets
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 has recorded the Series B Convertible Preferred Stock at its
Redemption Price of $19.0 million and has recorded corresponding charges to net
loss available for common shareholders and accumulated deficit as of December
31, 1999. As such, the total accretion in 1999 aggregated approximately
$6,930,000.
For further discussion of the Series A and B Preferred Shares and Common
Stock see Notes A, L and N to the Consolidated Financial Statements.
14
As discussed elsewhere in this 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 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. The Company intends to continue funding the LLC operation only through
the first quarter of 2000. After that time, management intends to either sell
the LLC or abandon the efforts to further develop its technology. Costs of
funding the LLC after December 31, 1999 total less than $50,000.
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.
The Company is relying on its leading products, BASE10(R)FS, BASE10(R)ADLS
and BASE10(R)ADMS to stimulate new orders. Neither the additional development of
the Company's MES and clinical studies 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.
Income Taxes
- ------------
At December 31, 1999, the Company had incurred net operating loss ("NOL")
carryforwards for federal income tax purposes of approximately $65.8 million,
which expire in the years 2004 through 2019. Research and development
carryforwards of $0.5 million expire in the years 2000 through 2006. As certain
changes in the Company's ownership occur there is a limitation on the annual
amount of such NOL carryforwards and credits which can be utilized. Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 109")
requires that a valuation allowance be created and offset against the deferred
tax assets if, based on existing facts and circumstances, it is more likely than
not that some portion or all of the deferred tax asset will not be realized. The
valuation allowance will be adjusted when the credits are realized or when, in
the opinion of management, sufficient additional positive evidence exists
regarding the likelihood of their realization. The reductions, if any, will be
reflected as a component of income tax expense.
New Accounting Pronouncements
- -----------------------------
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133") will be effective for
the Company in the first quarter of 2001 and establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires companies to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. It is expected that the adoption of FAS 133 will not have a material
effect on the Company's financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements". This SAB summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. As amended by SAB 101A, this SAB must be implemented no later than
June 30, 2000. The Company does not expect the accounting and disclosures
discussed in SAB 101 to have a material impact on its financial statements.
15
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
Index to Financial Statements
Page
-----
Report of Independent Accountants............................................................................ F-1
Independent Auditors' Report................................................................................. F-2
Consolidated Balance Sheets - December 31, 1999 and December 31, 1998........................................ F-3
Consolidated Statements of Operations - Years ended December 31, 1999 and 1998 and October 31, 1997
and the Two Month Transition Period from November 1, 1997 through December 31, 1997....................... F-4
Consolidated Statements of Common Stock and Other Shareholders' Equity (Deficit) - Years ended
December 31, 1999 and 1998 and October 31, 1997 and the Two Month Transition
Period from November 1, 1997 through December 31, 1997.................................................... F-5
Consolidated Statements of Cash Flows - Years ended December 31, 1999 and 1998 and October 31, 1997
and the Two Month Transition Period from November 1, 1997 through December 31, 1997....................... F-7
Notes to Consolidated Financial Statements................................................................... F-8
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
--------------------
On March 13, 1998, the Company engaged PricewaterhouseCoopers LLP
("PricewaterhouseCoopers"), independent certified public accountants, as the
Company's auditors for the 1998 fiscal year. During the Company's two preceding
fiscal years and the subsequent interim period preceding March 13, 1998, neither
the Company (nor anyone acting on the Company's behalf) consulted with
PricewaterhouseCoopers regarding the application of accounting principles to a
specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Company's financial statements, and
neither a written report nor oral advice was provided to the Company by
PricewaterhouseCoopers; or matters which would require disclosure pursuant to
Items 304(a)(1)(iv) and 304(a)(1)(v) of Regulation S-K.
On March 3, 1998, the Company dismissed Deloitte & Touche LLP ("Deloitte &
Touche") as the principal accountant to audit the Registrant's financial
statements. The reports of Deloitte & Touche on the Company's financial
statements for the past two fiscal years did not contain an adverse opinion or a
disclaimer of opinion, nor were such reports qualified or modified as to
uncertainty, audit scope or accounting principles. The decision to dismiss
Deloitte & Touche was approved by the Company's Board of Directors.
During the two preceding fiscal years and the subsequent interim period
preceding March 3, 1998, there were no disagreements with Deloitte & Touche on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which, if not resolved to Deloitte &
Touche's satisfaction, would have caused Deloitte & Touche to make reference to
the subject matter of the disagreement in connection with its report. During the
two preceding fiscal years and the subsequent interim period preceding March 3,
1998, Deloitte & Touche did not advise the Company of any matters set forth in
Item 304(a)(1)(v) of Regulation S-K. Deloitte & Touche furnished the Company
with a letter addressed to the Securities and Exchange Commission stating that
it agreed with this disclosure, which was filed as an exhibit to the Company's
Current Report on Form 8-K, dated March 3, 1998.
16
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Information concerning the Company's executive officers is set forth in
Part I, Item 1, under the caption "Executive Officers," and is incorporated
herein by reference. The information called for by Item 10 concerning the
Company's directors will be included in the Company Proxy Statement for its 2000
Annual Meeting of Shareholders, under the caption, "Election of Directors," and
is incorporated herein by reference.
Item 11. Executive Compensation
- --------------------------------
The information called for by Item 11 concerning Executive Compensation
will be included in the Company's Proxy Statement for its 2000 Annual Meeting of
Shareholders, under the caption, "Executive Compensation," and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information called for by item 12 concerning beneficial ownership of
certain beneficial owners and management will be included in the Company's Proxy
Statement for its 2000 Annual Meeting of Shareholders, under the caption,
"Security Ownership of Certain Beneficial Owners and Management," and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information called for by Item 13 concerning certain relationships and
related transactions will be included in the Company's Proxy Statement for its
2000 Annual Meeting of Shareholders under the caption, "Certain Transactions
with Related Parties," and is incorporated herein by reference.
17
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K
- ----------------------------------------------------------------
(a) Financial Statements and Schedules:
1. Financial Statements: The Financial Statements listed in the
Index under Item 8 are included in this Annual Report at the
pages indicated.
2. Financial Statement Schedules: The financial statement schedules
for which provision is made in Regulation S-X have been omitted
because the required information is either presented in the
Financial Statements or the Notes thereto or is not applicable.
3. Exhibits: See the Exhibit Index on pages 49 through 56 of this
Annual Report.
(b) Reports on Form 8-K: The Company filed a Current Report on Form
8-K, on November 10, 1999, announcing the election of Robert
Hurwitz as Chairman of the Board of Directors and the
appointment of Stephen A. Cloughley as President and Chief
Executive Officer. On April 12, 2000, the Company filed a
Current Report on Form 8-K regarding the execution of the
employment agreement between the Company and Stephen A.
Cloughley dated as of October 28, 1999 and disclosing the
termination agreement between the Company and Thomas E. Gardner
dated as of October 28, 1999.
18
Report of Independent Accountants
The Board of Directors and Shareholders
Base Ten Systems, Inc.
Trenton, New Jersey 08619
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of common stock and other shareholders'
equity (deficit) and of cash flows present fairly, in all material respects, the
financial position of Base Ten Systems, Inc. and its subsidiaries at December
31, 1999 and December 31, 1998 and the results of their operations and cash
flows for the years ended December 31, 1999 and December 31, 1998 and the
two-months ended December 31, 1997 in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion expressed above. The financial
statements of Base Ten Systems, Inc., and its subsidiaries for the year ended
October 31, 1997 were audited by other independent accountants whose report
dated February 6, 1998 expressed an unqualified opinion on those statements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has suffered recurring losses from operations
and has redeemable preferred stock that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note A. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
April 3, 2000
F-1
Independent Auditors' Report
The Board of Directors and Shareholders
Base Ten Systems, Inc.
Trenton, New Jersey 08619
We have audited the consolidated statements of operations, of common stock
and other shareholders' equity (deficit), and of cash flows of Base Ten
Systems, Inc. and subsidiaries as of October 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of their operations
and their cash flows of Base Ten Systems, Inc. and subsidiaries for the
year ended October 31, 1997 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
February 6, 1998
F-2
Base Ten Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except par value)
Assets
December 31, December 31,
1999 1998
------------------ -----------------
Current Assets:
Cash and cash equivalents.................................................. $ 5,843 $ 17,437
Accounts receivable, net..................................................... 559 2,372
Current portion of notes receivable.......................................... 658 -
Other current assets......................................................... 441 639
------------------ -----------------
Total Current Assets................................................... 7,501 20,448
Property, plant and equipment, net.............................................. 4,564 5,026
Note receivable................................................................. 1,317 1,975
Acquired intangible assets...................................................... 5,210 2,131
Other assets.................................................................... 485 4,241
------------------ -----------------
Total Assets $ 19,077 $ 33,821
================== =================
Liabilities, Redeemable Convertible Preferred Stock,
Common Stock and
Other Shareholders' Equity (Deficit)
Current Liabilities:
Accounts payable............................................................. $ 345 $ 984
Accrued expenses............................................................. 1,770 3,152
Deferred revenue............................................................. 1,423 756
Current portion of financing obligation...................................... 136 74
------------------ -----------------
Total Current Liabilities.............................................. 3,674 4,966
------------------ -----------------
Long-Term Liabilities:
Long-term debt............................................................... - 10,000
Financing obligation......................................................... 3,204 3,341
Other long-term liabilities.................................................. 214 228
------------------ -----------------
Total Long-Term Liabilities............................................ 3,418 13,569
------------------ -----------------
Commitments and Contingencies - (Notes A and K)
Redeemable Convertible Preferred Stock:
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 December 31, 1999; aggregate
liquidation value of $15,203 at December 31, 1999........................... 19,004 -
------------------ -----------------
19,004 12,914
------------------ -----------------
Common Stock and Other Shareholders' Equity (Deficit):
Class A Common Stock, $5.00 par value, 12,000,000 shares
authorized; issued and outstanding 5,102,096 shares at
December 31, 1999 and 3,731,950 shares at December 31, 1998................. 25,510 18,660
Class B Common Stock, $5.00 par value, 400,000 shares
authorized; issued and outstanding 14,181 shares at
December 31, 1999 and 14,282 shares at December 31, 1998.................... 71 71
Additional paid-in capital................................................... 63,527 52,885
Accumulated Deficit.......................................................... (95,754) (68,767)
------------------ -----------------
(6,646) 2,849
Accumulated other comprehensive income (loss)................................ (92) (196)
Treasury Stock, 20,000 Class A Common Shares, at cost........................ (281) (281)
------------------ -----------------
Total Common Stock and Other Shareholders' Equity (Deficit)............ (7,019) 2,372
------------------ -----------------
Total Liabilities, Redeemable Convertible Preferred Stock,
and Common Stock and Other Shareholders' Equity (Deficit)............. $ 19,077 $ 33,821
================== =================
See Notes to the Consolidated Financial Statements
F-3
Base Ten Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(dollars in thousands, except per share data)
Year Year Two Months Year
ended ended ended Ended
December 31, December 31, December 31, October 31,
1999 1998 1997 197
----------------- --------------- --------------- ----------------
License and related revenue................................ $ 1,262 $ 2,727 $ -- $ 1,221
Services and related revenue............................... 3,102 4,823 181 1,291
---------------- ----------------- --------------- -----------------
4,364 7,550 181 2,512
---------------- ----------------- --------------- -----------------
Cost of revenues........................................... 6,961 9,639 1,457 6,387
Research and development................................... 1,240 2,002 25 147
Selling and marketing...................................... 6,315 5,003 569 2,736
General and administrative................................. 7,828 8,944 1,647 7,743
Non-cash debt conversion charge............................ 3,506 -- -- --
---------------- ----------------- --------------- -----------------
25,850 25,588 3,698 17,013
---------------- ----------------- --------------- -----------------
Loss from continuing operations before other income
(expense) and income tax benefit.......................... (21,486) (18,038) (3,517) (14,501)
Other income (expense), net................................ 160 (982) (197) (1,479)
---------------- ----------------- --------------- -----------------
Loss from continuing operations before income tax benefit..
(21,326) (19,020) (3,714) (15,980)
---------------- ----------------- --------------- -----------------
Income tax benefit......................................... -- -- -- --
---------------- ----------------- --------------- -----------------
Net loss from continuing operations........................ (21,326) (19,020) (3,714) (15,980)
---------------- ----------------- --------------- -----------------
Discontinued operations:
Loss from operations of Government Technology Division.....
-- -- (222) (4,854)
Gain (loss) on sale........................................ 1,086 -- -- (1,173)
---------------- ----------------- --------------- -----------------
Gain (loss) from discontinued operations................... 1,086 -- (222) (6,027)
---------------- ----------------- --------------- -----------------
Net loss................................................... $ (20,240) $ (19,020) $ (3,936) $ (22,007)
---------------- ----------------- --------------- -----------------
Less: Dividends on Redeemable Convertible Preferred Stock (262) (1,740) -- --
Accretion on Redeemable Convertible Preferred Stock (6,930) (1,424) -- --
Credit on exchange of Redeemable Convertible 445 -- -- --
Preferred Stock....................................
---------------- ----------------- --------------- -----------------
Net loss available for common shareholders................. $ (26,987) $ (22,184) $ (3,936) $ (22,007)
================ ================= =============== =================
Basic and diluted gain (loss) per share:
Continuing operations...................................... $ (6.07) $ (10.45) $ (2.25) $ (10.12)
Discontinued operations.................................... .23 -- (0.13) (3.82)
---------------- ----------------- --------------- -----------------
Net loss per share......................................... $ (5.84) $ (10.45) $ (2.38) $ (13.94)
---------------- ----------------- --------------- -----------------
Weighted average common shares outstanding - basic and
diluted................................................. 4,624,000 2,124,000 1,652,000 1,579,000
---------------- ----------------- --------------- -----------------
See Notes to the Consolidated Financial Statements
F-4
Base Ten Systems, Inc. and Subsidiaries
Consolidated Statements of Common Stock and Other Shareholders' Equity (Deficit)
(dollars in thousands)
Accumulated
Class A Class B Additional Other
Common Stock Common Stock Paid-In Accumulated Comprehensive
Shares Amount Shares Amount Capital Deficit Income (Loss)
- -------------------------- ------------ ------------ ------------ --------- ---------- ------------ ----------------
Balance
October 31, 1996 ......... 1,471,793 $ 7,359 89,077 $ 445 $25,086 $(20,640) $ (110)
Conversions:
Common B to
Common A ............. 53 -- (53) -- -- -- --
Exercise of
options .................. 18,646 93 -- -- 506 -- --
Exercise of
warrants ................. 61,000 305 -- -- 1,017 -- --
Issuance of
Common Stock:
Interest payments .... 2,298 12 -- -- 99 -- --
Compensation
related to warrants
and options issuance ..... -- -- -- -- 2,750 -- --
Comprehensive
Income (Loss):
Net loss ............. -- -- -- -- -- (22,007) --
Foreign currency
translation .......... -- -- -- -- -- -- 9
Unrealized gain on
securities available
for sale ............. -- -- -- -- -- -- 94
Total Comprehensive
Income (Loss) ............ -- -- -- -- -- -- --
- -------------------------- --------- ------ ------- -------- ------- -------- -----
Balance
October 31, 1997 ......... 1,553,790 7,769 89,024 445 29,458 (42,647) (7)
========================== ========= ====== ======= ======== ======= ======== =====
Exercise of options ...... 10,117 51 -- -- 445 -- --
Issuance of
Common Stock:
Interest payments .... 1,837 9 -- -- 102 -- --
Common Stock Warrants,
net of subscription
receivable of $ 851 ...... -- -- -- -- 1,840 -- --
Compensation
related to warrants
and options issuance ..... -- -- -- -- 543 -- --
Comprehensive
Income (Loss):
Net loss ............. -- -- -- -- -- (3,936) --
Foreign currency
translation .......... -- -- -- -- -- -- (45)
Unrealized loss on
securities available
for sale ............. -- -- -- -- -- -- (81)
Total Comprehensive
Income (Loss): ........... -- -- -- -- -- -- --
- -------------------------- --------- ------- ------- -------- ------- -------- -----
Balance at
December 31, 1997 ........ 1,565,744 $ 7,829 89,024 $ 445 $32,388 $(46,583) $ (133)
========================== ========= ======= ======= ======== ======= ======== =====
Total
Shareholders'
Treasury Stock Equity
Shares Amount (Deficit)
----------- ------------ ------------
Balance
October 31, 1996 ......... -- $ -- $ 12,140
Conversions:
Common B to
Common A ............. -- -- --
Exercise of
options .................. -- -- 599
Exercise of
warrants ................. -- -- 1,322
Issuance of
Common Stock:
Interest payments .... -- -- 111
Compensation
related to warrants
and options issuance ..... -- -- 2,750
Comprehensive
Income (Loss):
Net loss ............. -- -- (22,007)
Foreign currency
translation .......... -- -- 9
Unrealized gain on
securities available
for sale ............. -- -- 94
Total Comprehensive
Income (Loss) ............ -- -- (21,904)
- -------------------------- ------- ------------ --------
- -------------------------- ------- ------------ --------
Balance
October 31, 1997 ......... -- -- (4,982)
========================== ======= ============ ========
Exercise of options ...... -- -- 496
Issuance of
Common Stock:
Interest payments .... -- -- 111
Common Stock Warrants,
net of subscription
receivable of $ 851 ...... -- -- 1,840
Compensation
related to warrants
and options issuance ..... -- -- 543
Comprehensive
Income (Loss):
Net loss ............. -- -- (3,936)
Foreign currency
translation .......... -- -- (45)
Unrealized loss on
securities available
for sale ............. -- -- (81)
Total Comprehensive
Income (Loss): ........... -- -- (4,062)
- -------------------------- ------- ------------ --------
- -------------------------- ------- ------------ --------
Balance at
December 31, 1997 ........ -- $ -- $ (6,054)
========================== ======= ============ ========
See Notes to the Consolidated Financial Statements
F-5
Base Ten Systems, Inc. and Subsidiaries
Consolidated Statements of Common Stock and Other Shareholders' Equity (Deficit)(continued)
(dollars in thousands)
Class A Class B Additional
Common Stock Common Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit
- -------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Balance
at December 31, 1997 ..... 1,565,744 $ 7,829 89,024 $ 445 $ 32,388 $(46,583) $(133)
========================== ========= ======= ======= ===== ======== ======== =====
Conversions:
Common B to
Common A ............. 113,596 568 (75,731) (379) (189) -- --
Preferred A to
Common A ............. 383,561 1,918 -- -- 3,016 -- --
Debenture to
Common A ............. 298,161 1,491 -- -- 3,680 -- --
Exercise of options ...... 30,046 150 989 5 525 -- --
Issuance of
Common Stock:
Private placement .... 1,333,333 6,666 -- -- 12,127 -- --
Interest payments .... 6,152 31 -- -- 157 -- --
Employee stock
purchase plan ........ 1,357 7 -- -- 8 -- --
Compensation related
to warrants and
options issuance ......... -- -- -- -- 322 -- --
Dividends on Redeemable
Preferred Stock .......... -- -- -- -- -- (1,740) --
Accretion on Redeemable
Preferred Stock .......... -- -- -- -- -- (1424) --
Collection of
Subscription Receivable .. -- -- -- -- 851 -- --
Treasury stock
purchase ................. -- -- -- -- -- -- --
Comprehensive
Income (Loss):
Net loss ............. -- -- -- -- -- (19,020) --
Foreign currency
translation .......... -- -- -- -- -- -- (55)
Unrealized gain on
securities available
for sale ............. -- -- -- -- -- -- (8)
Total Comprehensive
Income (Loss) ............ -- -- -- -- -- -- --
- -------------------------- --------- ------- ------- ----- -------- -------- -----
Balance at
December 31, 1998 ........ 3,731,950 $18,660 14,282 $ 71 $ 52,885 $(68,767) $(196)
========================== ========= ======= ======= ===== ======== ======== =====
Conversions:
Common B to
Common A ............. 153 -- (101) -- -- -- --
Preferred A to
Common A ............. 5,739 29 -- -- (29) -- --
Debenture to
Common A ............. 500,000 2,500 -- -- 10,626 -- --
Issuance of
Common Stock:
Acquisition of
Almedica Technology
Group, Inc. .......... 790,000 3,950 -- -- (370) -- --
Exercise of options .. 50 -- -- -- -- -- --
Employee stock
purchase plan ........ 24,204 121 -- -- (38) -- --
Non-cash employee
compensation ......... 50,000 250 -- -- (206) -- --
Dividends on Redeemable
Preferred Stock .......... -- -- -- -- -- (262) --
Accretion on Redeemable
Preferred Stock .......... -- -- -- -- -- (6,930) --
Credit on Exchange of
Redeemable Preferred
Stock .................... -- -- -- -- 659 445 --
Comprehensive
Income (Loss):
Net loss ............. -- -- -- -- -- (20,240) --
Foreign currency
translation .......... -- -- -- -- -- -- 127
Unrealized loss on
securities available
for sale ............. -- -- -- -- -- -- (23)
Total Comprehensive
Income (Loss) ............ -- -- -- -- -- -- --
- -------------------------- --------- ------- ------- ----- -------- -------- -----
Balance at
December 31, 1999 ........ 5,102,096 $25,510 14,181 $ 71 $ 63,527 $(95,754) $ (92)
========================== ========= ======= ======= ===== ======== ======== =====
Total
Shareholders'
Treasury Stock Equity
Shares Amount (Deficit)
------------- ----------- ------------
Balance
at December 31, 1997 ..... -- $-- $ (6,054)
========================== ======== ===== ========
Conversions:
Common B to
Common A ............. -- -- --
Preferred A to
Common A ............. -- -- 4,934
Debenture to
Common A ............. -- -- 5,171
Exercise of options ...... -- -- 680
Issuance of
Common Stock:
Private placement .... -- -- 18,793
Interest payments .... -- -- 188
Employee stock
purchase plan ........ -- -- 15
Compensation related
to warrants and
options issuance ......... -- -- 322
Dividends on Redeemable
Preferred Stock .......... -- -- (1,740)
Accretion on Redeemable
Preferred Stock .......... -- -- (1,424)
Collection of
Subscription Receivable .. -- -- 851
Treasury stock
purchase ................. (100,000) (281) (281)
Comprehensive
Income (Loss):
Net loss ............. -- -- (19,020)
Foreign currency
translation .......... -- -- (55)
Unrealized gain on
securities available
for sale ............. -- -- (8)
Total Comprehensive
Income (Loss) ............ -- -- (19,083)
- -------------------------- -------- ----- --------
Balance at
December 31, 1998 ........ (100,000) $(281) $ 2,372
========================== ======== ===== ========
Conversions:
Common B to
Common A ............. -- -- --
Preferred A to
Common A ............. -- -- --
Debenture to
Common A ............. -- -- 13,126
Issuance of
Common Stock:
Acquisition of
Almedica Technology
Group, Inc. .......... -- -- 3,580
Exercise of options .. -- -- --
Employee stock
purchase plan ........ -- -- 83
Non-cash employee
compensation ......... -- -- 44
Dividends on Redeemable
Preferred Stock .......... -- -- (262)
Accretion on Redeemable
Preferred Stock .......... -- -- (6,930)
Credit on Exchange of
Redeemable Preferred
Stock .................... -- -- 1,104
Comprehensive
Income (Loss):
Net loss ............. -- -- (20,240)
Foreign currency
translation .......... -- -- 127
Unrealized loss on
securities available
for sale ............. -- -- (23)
Total Comprehensive
Income (Loss) ............ -- -- (20,136)
- -------------------------- -------- ----- --------
Balance at
December 31, 1999 ........ (100,000) $(281) $ (7,019)
========================== ======== ===== ========
See Notes to the Consolidated Financial Statements
F-6
Base Ten Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(dollars in thousands)
Two Months Year Ended
Year Ended Year Ended Ended October 31,
December 31, 1999 December 31, 1998 December 31, 1997 1997
- ------------------------------------------------------------- ------------------- ------------------- ------------------ -----------
Cash Flows from Operating Activities:
Net loss ............................................... $ (20,240) $ (19,020) $ (3,936) $ (22,007)
Adjustments to Reconcile Net Loss to Net Cash Used in
Operating Activities of Continuing Operations:
Bad debt expense........................................ 185 449 -- --
Depreciation and amortization........................... 4,866 3,295 360 3,703
Stock-based compensation................................ 44 322 543 2,750
Deferred gain on sale of building....................... (14) (19) (3) (19)
Non-cash debt conversion charge......................... 3,506 -- -- --
Gain on sale of discontinued operations................. (1,086) -- -- --
Changes in operating assets and liabilities, excluding
effects of discontinued business:
Accounts receivable..................................... 1,828 (1,238) 225 2,008
Other current assets.................................... 257 (117) 433 305
Other assets............................................ 500 -- -- --
Accounts payable, accrued expenses and deferred revenue.
(2,326) (802) (1,657) 3,792
- ------------------------------------------------------------- ---------------- ------------------- ---------------- ----------------
Net Cash Used in Operations.................................. (12,712) (17,130) (4,035) (9,468)
- ------------------------------------------------------------- ---------------- ------------------- ---------------- ----------------
Cash Flows from Investing Activities:
Additions to property, plant and equipment ............. (153) (592) (244) (617)
Additions to capitalized software costs................. -- (724) (148) (3,360)
Purchase of assets related to FlowStream product ....... -- (2,099) -- --
Acquisition of Almedica Technology Group, net of ....... --
cash acquired ............................................... (66) -- --
- ------------------------------------------------------------- ---------------- ------------------- ---------------- ----------------
Net Cash Used in Investing Activities........................ (219) (3,415) (392) (3,977)
- ------------------------------------------------------------- ---------------- ------------------- ---------------- ----------------
Cash Flows from Financing Activities:
Repayment of amounts borrowed........................... (75) (53) (14) (59)
Proceeds from issuance of long-term debt................ -- -- -- 5,500
Proceeds from issuance of redeemable preferred stock -- 9,380 7,995 --
Proceeds from issuance of common stock.................. 83 19,592 607 2,032
Proceeds from sale of discontinued business............. 1,086 -- 3,500 --
- ------------------------------------------------------------- ---------------- ------------------- ---------------- ----------------
Net Cash Provided from Financing Activities 1,094 28,919 12,088 7,473
- ------------------------------------------------------------- ---------------- ------------------- ---------------- ----------------
Effect of Exchange Rate Changes on Cash...................... 11 (55) (45) 9
- ------------------------------------------------------------- ---------------- ------------------- ---------------- ----------------
Net (Decrease)/Increase In Cash and Cash Equivalents......... (11,594) 8,319 7,616 (5,963)
Cash and Cash Equivalents, beginning of year................. 17,437 9,118 1,502 7,465
- ------------------------------------------------------------- ---------------- ------------------- ---------------- ----------------
Cash and Cash Equivalents, end of year....................... $ 5,843 $ 17,437 $ 9,118 $ 1,502
- ------------------------------------------------------------- ---------------- ------------------- ---------------- ----------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for interest.................. $ 641 $ 1,401 $ 88 $ 937
- ------------------------------------------------------------- ---------------- ------------------- ---------------- ----------------
Supplemental Disclosures of Non-Cash Investing and Financing
Activities:
Acquisition of BTS Clinical, Inc........................ $ 3,580 $ -- $ -- $ --
Treasury stock purchase obligation...................... $ -- $ 281 $ -- $ --
- ------------------------------------------------------------- ---------------- ------------------- ---------------- ----------------
See Notes to the Consiidated Financial Statements
F-7
Base Ten Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, December 31, 1998, October 31, 1997 and
Two Months Ended December 31, 1997
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. Also, at December 31, 1999 the Company was
below the $2 million minimum net tangible assets, as defined, 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 Convertible
Preferred Stock may require the Company to redeem the Series B 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
Convertible Preferred Stock. (See Note L 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 further increase the
Company's net tangible assets and in order to 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 or investment from a strategic investor. 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.
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. See Note D to the Consolidated Financial Statements.
The Company also develops and markets other medical devices, including
uPACs(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, the Company formed a limited liability company
("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. Base Ten has a 9% interest in the LLC and the investor has a
91% interest in the LLC.
For the periods ended October 31, 1997 and December 31, 1997, the Company
was also engaged, through its Government Technology Division ("GTD"), in the
design and manufacture of electronic systems employing safety critical software
for the defense industry. Effective December 31, 1997, the GTD was sold by the
Company. See Note R to the Consolidated Financial Statements.
C. Summary of Significant Accounting Policies
- -----------------------------------------------
1. Principles of Consolidation - The consolidated financial statements
include the accounts of Base Ten and its wholly owned subsidiaries. All
significant inter-company accounts, transactions and profits have been
eliminated.
2. Discontinued Operations - As discussed more thoroughly in Note R to the
Consolidated Financial Statements, the results of operations and the net
assets of the Government Technology Division have been reported separately
as discontinued operations for all periods presented in the accompanying
financial statements.
F-8
3. Change of Fiscal Reporting Period - In January 1998, the Board of
Directors approved a change of the Company's fiscal year end from October
31 to December 31.
4. 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 NASDAQ
minimum net tangible asset requirements required 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 Convertible Preferred
Stock. (See Notes A and L 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 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.
5. Revenue Recognition - The Company has adopted AICPA Statement of Position
97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended in 1998 by
SOP 98-4 and further amended by SOP 98-9, which is effective for
transactions entered into after fiscal years beginning after March 15,
1999. The SOPs provide guidance on when revenue should be recognized and
in what amounts as well as what portion of the Company's licensing
transactions should be deferred.
The Company licenses software under license agreements and provides
services including maintenance, training and consulting. In general,
software license revenues are recognized upon shipment of the software to
the customer where there are no significant customizations or
modifications required or other obligations of the Company. Revenues on
all software license transactions in which there are significant
customizations or modifications or other obligations of the Company are
recognized on the percentage of completion basis. Progress under
percentage of completion method is measured based on management's best
estimate of the cost of work completed in relation to the total cost of
work to be performed under the contract. Maintenance contract revenues are
deferred and recognized ratably over the maintenance period which is
generally one year. Revenues from consulting services are recognized as
such services are performed and are on a time and material basis.
6. Property, Plant and Equipment - Property, plant and equipment are carried
at cost and depreciated over estimated useful lives, principally on the
straight-line method. The estimated useful lives used for the
determination of depreciation and amortization are:
Leased asset - building 30 years
Leasehold improvements 5 to 10 years
Furniture, fixtures and equipment 3 to 10 years
Maintenance and repairs are charged to expense as incurred; expenditures
for leasehold improvements are generally capitalized. Upon sale or
retirement of an asset, the related costs and accumulated depreciation are
removed from the accounts and any gain or loss is recognized.
7. Research, Development and Computer Software Costs - In accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for Costs
for Computer Software to be Sold, Leased or Otherwise Marketed" ("FAS
86"), the Company capitalizes certain software development costs for new
products once it is determined that technological feasibility is achieved.
Costs incurred prior to the determination of technological feasibility and
costs associated with maintenance of existing products are expensed as
incurred. The cost of purchased software is capitalized when related to a
product which has achieved technological feasibility or that has an
alternative future use. Commencing upon initial product release, these
costs are amortized based on the greater of actual to total sales, or the
straight-line method over the estimated useful life of not greater than
four years.
F-9
8. Long-Lived Assets - The Company accounts for long-lived assets in
accordance with the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for Impairment of Long-Lived Assets and
Long Lived Assets to be Disposed Of" ("FAS 121"). FAS 121 requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company performs
annual reviews of the recoverability of its capitalized software costs and
other long lived assets based on anticipated revenues and cash flows from
sales of these products. The Company considers historical performance and
future estimated results in its evaluation of potential impairment and
then compares the carrying amount of the asset to the estimated future
cash flows expected to result from the use of the asset. If the carrying
amount of the asset exceeds estimated expected undiscounted future cash
flows, the Company measures the amount of the impairment by comparing the
carrying amount of the asset to its fair value. The estimation of fair
value is generally measured by discounting expected future cash flows at
the rate the Company utilizes to evaluate potential investments. The
Company estimates fair value based on the best information available
making whatever estimates, judgments and projections are considered
necessary. As a result of its evaluation of long-lived assets as of
December 31, 1999, the Company determined that the carrying amount of
capitalized development costs of BASE10(R)ME and BASE10(R)CS software
exceeded its net realizable value. Accordingly, the Company wrote off
$1,225,000 of such capitalized costs at that date.
9. Cash and Cash Equivalents - The Company considers all investments with an
original maturity of three months or less at date of acquisition to be
cash equivalents.
10. Earnings 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.
11. Fair Value of Financial Instruments - The fair value of certain financial
instruments, including cash, accounts receivable, accounts payable, and
other accrued liabilities, approximates the amount recorded in the balance
sheet because of the relatively current maturities of these financial
instruments. The fair market value of long term debt at December 31, 1999
and December 31, 1998 approximates the amounts recorded in the balance
sheet based on information available to the Company with respect to
interest rates and terms for similar financial instruments.
12. Foreign Currency Translation - The accounts of the consolidated foreign
subsidiaries are translated into United States dollars in accordance with
Statement of Financial Accounting Standard No. 52, "Foreign Currency
Translation" ("FAS 52"). All balance sheet accounts have been translated
using the current rate of exchange at the balance sheet date. Results of
operations have been translated using the average rates prevailing
throughout the year. Translation gains or losses resulting from the
changes in the exchange rates from year-to-year are accumulated in a
separate component of shareholders' equity. Transaction losses were
$162,000 for the year ended December 31, 1999 and immaterial for the years
ended December 31, 1998 and October 31, 1997 and for the two months ended
December 31, 1997.
13. Income Taxes - Deferred income taxes are determined based on the tax
effect of the differences between the financial statement and tax bases of
assets and liabilities. Deferred tax assets and liabilities are classified
as either current or noncurrent based generally on the classification of
the related asset or liability.
14. 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 December 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 December 31, 1999, December 31, 1998,
consisted of common stock with a cost basis of $50,000 for each year and
are included in other current assets. Differences between cost and market
of $30,000 and $54,000 were included as a component of "accumulated other
comprehensive income (loss)" in shareholders' equity, as of December 31,
1999 and December 31, 1998, respectively.
F-10
15. Segment Information - On January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 supersedes
Statement of Financial Accounting Standards No. 14, "Financial Reporting
for Segments of a Business Enterprise" ("FAS 14") replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the
Company's reportable segments. FAS 131 also requires disclosures about
products and services, geographic areas and major customers. The adoption
of FAS 131 did not affect results of operations or the financial position
but did affect the disclosure of segment information.
16. Comprehensive Income - On January 1, 1998, the Company adopted Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("FAS 130"). FAS 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income consists of net income and net
unrealized gains (losses) on securities and is presented in the
consolidated statements of shareholders' equity. The Statement requires
only additional disclosures in the consolidated financial statements; it
does not affect the Company's financial position or results of operations.
Prior year financial statements have been reclassified to conform to the
requirements of FAS 130.
17. Reclassifications - Certain reclassifications have been made to prior year
financial statements to conform to the current year presentation.
18. Recently Issued Accounting Standards - Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133") will be effective for the Company in the first
quarter of 2001 and establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires companies
to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. It is expected that the adoption of FAS 133 will not have a
material effect on the Company's financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements". This SAB summarizes certain of the SEC staff's views in
applying generally accepted accounting principles to revenue recognition
in financial statements. As amended by SAB 101A, this SAB must be
implemented no later than June 30, 2000. The Company does not expect the
accounting and disclosures discussed in SAB 101 to have a material impact
on its financial statements.
D. Acquisitions
- -----------------
From Consilium, Inc.
On February 19, 1998, the Company acquired certain assets and assumed
certain liabilities of Consilium, Inc. ("Consilium"), a software developer that
specialized in manufacturing execution systems for the pharmaceutical, chemical
and semi-conductor industries. The assets purchased related to the FlowStream
product line of Consilium, which was sold to the pharmaceutical and chemical
markets. Under the terms of the agreement, the Company paid Consilium $1.5
million in cash and assumed certain FlowStream-related liabilities of Consilium,
which together with transaction costs in cash of approximately $600,000,
resulted in a total purchase cost of $3.0 million. The agreement also provided
for additional payments based upon a percentage of the excess of targeted sales
of the FlowStream product, as defined, for the years ended December 31, 1998 and
1999, respectively. No additional payments were required for either year. The
cash portion of the acquisition was financed with the Company's available cash
balance. The acquisition has been accounted for under the purchase method, under
which assets and liabilities acquired are recorded by the Company at their fair
market value as of the purchase date.
The purchase price was allocated to the assets acquired based on their
estimated fair values. Equipment and furniture were purchased at estimated fair
value and are being depreciated over estimated lives of three to ten years.
Management estimated the value of certain amortizable assets to be $2.5 million
as of the purchase date. These assets are included in acquired intangible assets
and are being amortized on a straight line basis over their estimated lives of
three to seven years.
Unaudited Pro-forma Results
The following unaudited pro-forma information presents the results of
operations of the Company as if the acquisition of the FlowStream product line
had taken place on November 1, 1996 (dollars in thousands, except per share
data):
F-11
-----------------------------------------------------------------------------------------------------------------
Year Ended Two Months Ended Year Ended
December 31, December 31, October 31,
1998 1997 1997
-----------------------------------------------------------------------------------------------------------------
Revenue $ 8,259 $ 1,044 $ 7,839
Net loss (19,869) (4,969) (28,207)
- -------------------------------------------------------------------------------------------------------------------------
Net loss per common share - basic and diluted $ (10.85) $ (3.00) $ (17.85)
Weighted average common shares - basic and diluted (after
adjustment for September, 1999 reverse stock split)
2,124,000 1,652,000 1,579,000
- -------------------------------------------------------------------------------------------------------------------------
These pro-forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on the date
indicated, or which may result in the future.
From Almedica International, Inc.
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 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 December 31,
1999 and 1998 was $1,606,000 and $351,000, 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. During 1999, the
company amortized $257,000 of the value of the covenant. Subsequent to December
31, 1999, the executive left the employment of the Company and the covenant will
continue to be amortized over its remaining contractual life.
E. Accounts Receivable
- ------------------------
Accounts receivable are comprised of billed receivables arising from
recognized and deferred revenues and unbilled receivables, which result from
consulting services. All of the unbilled receivables are expected to be billed
during the following year. The Company does not require collateral for its
receivables. Reserves are maintained for potential credit losses. The principle
components of accounts receivables are as follows (dollars in thousands):
F-12
- ---------------------------------------------------------- ------------------- --------------------
December 31, December 31,
1999 1998
- ---------------------------------------------------------- ------------------- --------------------
Billed receivables $ 612 $ 2,456
Unbilled receivables 13 236
- ---------------------------------------------------------- ------------------- --------------------
625 2,692
Less: Allowance for doubtful accounts 66 320
- ---------------------------------------------------------- ------------------- --------------------
$ 559 $ 2,372
- ---------------------------------------------------------- ------------------- --------------------
Bad debt expense amounted to $185,000 during the year ended December 31,
1999, $449,000 during the year ended December 31, 1998 and $140,000 during the
year ended October 31,1997. There was no bad debt expense recorded during the
two-month period ended December 31, 1997.
F. Property, Plant and Equipment
- ----------------------------------
Property, plant and equipment at December 31, 1999 and 1998 includes the
following amounts (dollars in thousands):
- ----------------------------------------------------- ------------------- --------------------
December 31, December 31,
1999 1998
- ----------------------------------------------------- ------------------- --------------------
Leasehold improvements $ 370 $ 343
Furniture, fixtures and equipment 5,774 5,160
Land and building 3,600 3,600
- ----------------------------------------------------- ------------------- --------------------
9,744 9,103
Less: Accumulated depreciation 5,180 4,077
- ----------------------------------------------------- ------------------- --------------------
$ 4,564 $ 5,026
- ----------------------------------------------------- ------------------- --------------------
Depreciation expense amounted to $749,000, $412,000, $203,000, $530,000, and
$462,000, in fiscal 1999 and 1998, the two month period ended December 31, 1997,
and fiscal 1997, respectively.
G. Other Assets
- -----------------
Other assets at December 31, 1999 and 1998 include the following amounts
(dollars in thousands):
- ------------------------------------------------------------- -------------------------- -------------------------
December 31, December 31,
1999 1998
- ------------------------------------------------------------- -------------------------- -------------------------
Capitalized software costs, net $ 103 $ 2,943
Patents, net 332 355
Debenture issue costs, net -- 393
Deposits 50 550
- ------------------------------------------------------------- -------------------------- -------------------------
$ 485 $ 4,241
- ------------------------------------------------------------- -------------------------- -------------------------
Accumulated amortization related to the patents at December 31, 1999 and
1998 was $61,000 and $37,000, respectively.
Accumulated amortization related to the debenture issue costs at December
31, 1999 and 1998 was $0 and $207,000, respectively.
Accumulated amortization related to the capitalized software costs at
December 31, 1999 and 1998 was $9,814,000 and $7,050,000, respectively.
Amortization of capitalized software development costs of $2,763,000,
$2,274,000, $415,000 and $2,951,000 are included in cost of revenues for the
years ended December 31, 1999 and 1998, the two month period ended December 31,
1997 and the year ended October 31, 1997, respectively.
F-13
H. Income Taxes
- ----------------
The provision (benefit) for income taxes includes the following (dollars in
thousands):
- --------------------------------- --------------------- -------------------- --------------------- --------------------
Two Months Ended
Year Ended December Year Ended December 31, 1997 Year Ended October
31, 1999 December 31, 1998 31, 1997
- --------------------------------- --------------------- -------------------- --------------------- --------------------
Current:
Federal $ -- $ -- $ -- $ --
State -- -- -- --
Foreign -- -- -- --
- --------------------------------- --------------------- -------------------- --------------------- --------------------
Total Current $ -- $ -- $ -- $ --
- --------------------------------- --------------------- -------------------- --------------------- --------------------
Deferred:
Federal $ 5,879 $ 5,192 $ 1,179 $ 6,373
State 1,729 1,507 342 972
Foreign 488 -- -- --
- --------------------------------- --------------------- -------------------- --------------------- --------------------
Total Deferred 8,096 6,699 1,521 7,345
- --------------------------------- --------------------- -------------------- --------------------- --------------------
Valuation Allowance (8,096) (6,699) (1,521) (7,345)
- --------------------------------- --------------------- -------------------- --------------------- --------------------
Net $ -- $ -- $ -- $ --
- --------------------------------- --------------------- -------------------- --------------------- --------------------
A reconciliation of the Company's effective rate to the U.S. statutory rate
is as follows:
- ----------------------------------------------------------------- -----------------------------------------------------------------
Percentage of Pre-Tax Earnings
-----------------------------------------------------------------
Two Months
Year Ended Year Ended Ended December Year Ended
December 31, December 31, 31, 1997 October 31,
1999 1998 1997
- ----------------------------------------------------------------- ---------------- --------------- ---------------- ---------------
- ----------------------------------------------------------------- ---------------- --------------- ---------------- ---------------
Federal tax (benefit)/provisions at applicable statutory rates (34.0%) (34.0%) (34.0%) (35.0%)
Increases (decreases) in income taxes resulting from:
State tax benefit, net of Federal tax effect (6.0) (6.0) (6.0) --
Valuation allowances 40.0 40.0 40.0 35.0
- ----------------------------------------------------------------- ---------------- --------------- ---------------- ---------------
-- -- -- --
- ----------------------------------------------------------------- ---------------- --------------- ---------------- ---------------
F-14
The components of the deferred tax assets and liabilities are as follows
(dollars in thousands):
- --------------------------------------------------- ------------------- -------------------- -------------------- ------------------
Two Months Ended
Year Ended Year Ended December 31, 1997 Year Ended
December 31, 1999 December 31, 1998 October 31,1997
- --------------------------------------------------- ------------------- -------------------- -------------------- ------------------
Current
Vacation $ 51 $ 154 $ 221 $ 136
Other 247 605 56 16
- --------------------------------------------------- ------------------- -------------------- -------------------- ------------------
Total current assets 298 759 277 152
- --------------------------------------------------- ------------------- -------------------- -------------------- ------------------
Noncurrent
Deferred gain on sale leaseback $ 86 $ 91 $ 91 $ 90
Compensation 1,255 1,255 1,100 1,100
Depreciation and amortization (450) (107) 78 86
Net operating loss carryforward 26,115 17,210 10,963 9,560
Research and development
carryforward 519 519 519 519
- --------------------------------------------------- ------------------- -------------------- -------------------- ------------------
Total non-current assets 27,525 18,968 12,751 11,355
- --------------------------------------------------- ------------------- -------------------- -------------------- ------------------
Valuation allowance (27,823) (19,727) (13,028) (11,507)
- --------------------------------------------------- ------------------- -------------------- -------------------- ------------------
Net deferred tax assets $ -- $ -- $ -- $ --
- --------------------------------------------------- ------------------- -------------------- -------------------- ------------------
At December 31, 1999, the Company had incurred net operating loss ("NOL")
carryforwards for federal income tax purposes of approximately $65.3 million,
which expire in the years 2004 through 2019. Research and development
carryforwards of $0.5 million expire in the years 2000 through 2006. As certain
changes in the Company's ownership occur there is a limitation on the annual
amount of such NOL carryforwards and credits which can be utilized. Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 109")
requires that a valuation allowance be created and offset against the deferred
tax assets if, based on existing facts and circumstances, it is more likely than
not that some portion or all of the deferred tax asset will not be realized. The
valuation allowance will be adjusted when the credits are realized or when, in
the opinion of management, sufficient additional positive evidence exists
regarding the likelihood of their realization. The reductions, if any, will be
reflected as a component of income tax expense.
The components of loss before income taxes were as follows:
- ------------------------------------- ---------------------- ---------------------- --------------------- ----------------------
Year Ended December Year Ended December Two Months Ended Year Ended
31, 1999 31, 1998 December 31, 1997 October 31, 1997
- ------------------------------------- ---------------------- ---------------------- --------------------- ----------------------
- ------------------------------------- ---------------------- ---------------------- --------------------- ----------------------
Domestic $ (19,020) $ (16,679) $ (3,803) $ (20,632)
Foreign (1,220) (2,341) (133) (1,375)
- ------------------------------------- ---------------------- ---------------------- --------------------- ----------------------
$ (20,240) $ (19,020) $ (3,936) $ (22,007)
- ------------------------------------- ---------------------- ---------------------- --------------------- ----------------------
I. Accrued Expenses
- ---------------------
Accrued expenses at December 31, 1999 and 1998 includes the following
amounts (dollars in thousands):
-------------------------------------------------------------- ---------------------- -----------------------
December 31, December 31,
1999 1998
-------------------------------------------------------------- ---------------------- -----------------------
Wages & benefits $ 803 $ 1,297
Accrued contract costs and warranty 577 394
Accrued Interest -- 301
Other 390 1,160
-------------------------------------------------------------- ---------------------- -----------------------
$ 1,770 $ 3,152
-------------------------------------------------------------- ---------------------- -----------------------
F-15
J. 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 years ended December 31, 1999 and 1998, the two-month period ended December
31, 1997 and the year ended October 31, 1997 (dollars in thousands):
- ---------------------------------------------- ---------------------- --------------------- ---------------------- -----------------
United States Europe Eliminations Consolidated
- ---------------------------------------------- ---------------------- --------------------- ---------------------- -----------------
Year Ended December 31, 1999:
Revenues from unaffiliated sources $ 1,743 $ 2,385 $ -- $ 4,128
- ---------------------------------------------- ---------------------- --------------------- ---------------------- -----------------
Identifiable assets at December 31, 1999 $ 25,124 $ 1,857 $ (7,904) $ 19,077
- ---------------------------------------------- ---------------------- --------------------- ---------------------- -----------------
Year Ended December 31, 1998:
Revenues from unaffiliated sources $ 4,019 $ 3,531 $ -- $ 7,550
- ---------------------------------------------- ---------------------- --------------------- ---------------------- -----------------
Identifiable assets at December 31, 1998 $ 39,350 $ 1,353 $ (6,882) $ 33,821
- ---------------------------------------------- ---------------------- --------------------- ---------------------- -----------------
Two-Months Ended December 31, 1997:
- ---------------------------------------------- ---------------------- --------------------- ---------------------- -----------------
Revenues from unaffiliated sources $ 82 $ 99 $ -- $ 181
- ---------------------------------------------- ---------------------- --------------------- ---------------------- -----------------
Identifiable assets at December 31, 1997 $ 27,567 $ 1,137 $ (4,291) $ 24,413
- ---------------------------------------------- ---------------------- --------------------- ---------------------- -----------------
Year Ended October 31, 1997:
Revenues from unaffiliated sources $ 2,510 $ 2 $ -- $ 2,512
- ---------------------------------------------- ---------------------- --------------------- ---------------------- -----------------
Identifiable assets at October 31, 1997 $ 24,979 $ 1,205 $ (4,967) $ 21,217
- ---------------------------------------------- ---------------------- --------------------- ---------------------- -----------------
At December 31, 1999, four customers represented $295,000 (53%) of the
accounts receivable balance.
In fiscal year 1999, one customer accounted for sales of $593,000. In fiscal
year 1998, one customer accounted for sales amounting to $1,655,000 and four
customers accounted for sales of $136,000 in the two-month period ended December
31, 1997. In fiscal year 1997, three customers accounted for sales of
$1,221,000.
K. Commitments and Contingencies
- ----------------------------------
Legal Proceedings
The Company is involved from time to time in various claims and proceedings
including customer and employee claims in the normal course of business. The
Company has certain agreements with some of its customers which contain damage
or penalty clauses for non-delivery or delays beyond certain dates. Such damage
clauses vary by customer and may provide for a fixed amount of damages per day
or per week, and may or may not contain limitations on the aggregate amount of
such damage payments. At December 31, 1999, the Company has missed certain
delivery dates which provide, in one case, for the possible imposition of
payments by the Company of $10,000 per week. Management has maintained
discussions with its customers in an effort to satisfy customers' requirements
while minimizing exposure to damage claims. The Company has reserved
approximately $500,000 for such matters at December 31, 1999. While management
believes this amount is sufficient to cover all damage claims, if any, it is
possible that customer claims may exceed this amount and such additional amounts
could be material to the Company's financial position and statement of
operations when such amounts are finally determined.
Employment Agreements
At December 31, 1999, the Company had employment severance agreements with
seven employees. Subsequent to December 31, 1999, one of the employees covered
by the severance agreements entered into an employment termination agreement
under which the Company paid severance in the amount of $200,000. The remaining
severance agreements provide for up to six months of severance payments in the
aggregate of $163,000 plus normal benefits and any amounts due under incentive
compensation plans in the event the employee is terminated without cause. In
addition, subsequent to year end, the Company entered into similar agreements
with four additional employees with aggregate benefits amounting to $61,000.
At December 31, 1999, the Company had agreements with two executives
providing severance payments if the executive's employment is terminated within
three years after a change in control of the Company (i) by the Company for
reasons other than death, disability, or cause or (ii) by the executive for good
reason. The amount of the severance payment is 2.99 times total average
compensation and cost of employee benefits for each of the five years prior to
the change in control, subject to the amount deductible by the Company under the
Internal Revenue Code. One of the executives covered under these change of
control agreements terminated employment after December 31, 1999 without the
Company incurring any liability in accordance with the change of control
agreement.
F-16
Financing Obligation and Leases
The Company entered into a sale and leaseback arrangement on October 28,
1994. The buyer/lessor of the building was a partnership in which two of the
partners are former officers and directors of the Company. Under the
arrangement, the Company sold its main building in Trenton, New Jersey and
agreed to lease it back for a period of 15 years under terms that qualify the
arrangement. The Company also has an option to purchase the building at the end
of the lease and, accordingly, has accounted for this sale leaseback as a
financing transaction. Interest is calculated under the effective interest
method and depreciation is taken using the straight-line method. In addition, a
non-interest bearing security deposit of $550,000 was paid at closing which was
included in other non-current assets on the balance sheet. During 1999, the
Trenton facility was sold by the partnership to an unrelated third party. Under
the terms of the lease, the $550,000 deposit was returned to the Company.
In 1997, the Company sub-leased a portion of the building in connection with
the sale of the Government Technology Division. Rental payments to be received
in conjunction with the sublease will total approximately $240,000 in 2000 and
$264,000 per year in 2001 and 2002. The Company's future minimum gross lease
payments related to the sale-leaseback arrangement in effect at December 31,
1999 are as follows (dollars in thousands):
- ------------------------------------------------------- ---------------------
Year Ending December 31,
- ------------------------------------------------------- ---------------------
2000 $ 615
2001 615
2002 615
2003 615
2004 628
2005 and thereafter 3,335
- ------------------------------------------------------- ---------------------
6,423
Less interest portion (3,083)
- ------------------------------------------------------- ---------------------
Present value of net minimum payments $ 3,340
- ------------------------------------------------------- ---------------------
At December 31, 1999 and 1998, the gross amount of the building and the
related accumulated depreciation recorded under the financing obligation were as
follows (dollars in thousands):
------------------------------------------ ---------------------- ----------------------
December 31, December 31,
1999 1998
------------------------------------------ ---------------------- ----------------------
Land and building $ 3,600 $ 3,600
Less: Accumulated depreciation 620 500
------------------------------------------ ---------------------- ----------------------
$ 2,980 $ 3,100
------------------------------------------ ---------------------- ----------------------
F-17
The Company also has several noncancelable operating leases that expire over
the next eight years. These leases generally require the Company to pay all
executory costs such as maintenance and insurance. Rental expense for operating
leases during fiscal years 1999, 1998, 1997 were $574,000, $423,000 and
$307,000, respectively. Rental expense for operating leases for the two-month
period ended December 31, 1997 was $51,000. Future minimum lease payments under
noncancelable operating leases as of December 31, 1999 are (dollars in
thousands):
- ------------------------------------------ --------------------
Year Ending December 31,
- ------------------------------------------ --------------------
2000 $ 591
2001 292
2002 224
2003 128
2004 97
2005 and thereafter 336
- ------------------------------------------ --------------------
Total minimum lease payments $ 1,668
- ------------------------------------------ --------------------
During 1999, the Company was released of its obligations totaling $1,234,000
under an operating lease expiring in 2009 for office space in Newbury, England.
L. Redeemable Convertible Preferred Stock and Convertible Debt
- ----------------------------------------------------------------
$ 5.5 million Convertible Debenture
On May 30, 1997, the Company sold 55 Units ("Units") at $100,000 per Unit,
for an aggregate of $5,500,000, to two accredited purchasers ("Purchasers") in a
private offering (the "Offering"). Each Unit consisted of (i) an 8% five-year
convertible debenture ("Convertible Debenture") in the principal amount of
$100,000 convertible into shares of the Company's Class A Common Stock and (ii)
a warrant ("Warrant") to acquire 1,800 shares (360 after adjustment for the
reverse stock split) of Class A Common Stock. The number of shares of Class A
Common Stock that was issuable upon conversion of the Convertible Debentures was
variable. The number of shares were to be calculated at the time of conversion
and were to be the lesser of (i) the product obtained by multiplying (x) the
lesser of the average of the closing bid prices for the Class A Common Stock for
the (A) five or (B) thirty consecutive trading days ending on the trading day
immediately preceding the date of determination by (y) a conversion percentage
equal to 95% with respect to any conversions occurring prior to February 24,
1998 and 92% with respect to any conversions occurring on or after February 24,
1998 and (ii) $13.50 ($67.50 after adjustment for the reverse stock split) with
respect to any conversions occurring prior to May 30, 1998 or $14.00 ($70.00
after adjustment for the reverse stock split) with respect to any conversions
occurring on or after May 30, 1998. These prices were subsequently revised to
$13.05 ($65.25 after adjustment for the reverse stock split) and $13.53 ($67.65
after adjustment for the reverse stock split) pursuant to an agreement between
the holders and the Company in consideration of the holders' willingness to
grant the Company a waiver to sell the GTD. The Convertible Debentures were not
convertible prior to December 16, 1997. From December 16, 1997 until February
23, 1998 one-half of the Convertible Debentures could have been converted and
after February 23, 1998, the Convertible Debentures were fully convertible. The
Warrants may be exercised at any time through May 30, 2002 at an exercise price
of $12.25 ($61.25 after adjustment for the reverse stock split) per share. The
Company received net proceeds of approximately $4,950,000 from the sale of the
Units after deduction of fees and expenses related to the Offering. During 1998,
the $5.5 million Convertible Debentures were fully converted into 1,490,805
(298,161 after adjustment for the reverse stock split) shares of Class A Common
Stock.
$ 10 Million Convertible Subordinate Debenture
In August 1996 the Company sold $10.0 million 9.01% Convertible Subordinate
Debentures due August 31, 2003 in a private offering. Under the terms of the
debentures the holder could convert the debentures into the Company's Class A
Common Stock at $12.50 per share ($62.50 after adjustment for the reverse stock
split), 125% of the closing price on August 9, 1996. The Company had the right
to call the debentures after February 28, 1998 if the Company's Class A Common
Stock price traded between $15.00-$17.50 per share ($75.00 - $87.50 after
adjustment for the reverse stock split).
On November 10, 1998, the shareholders approved a proposal to authorize the
Company to decrease the conversion price from $12.50 ($62.50 after adjustment
for the reverse stock split) to $4.00 ($20.00 after adjustment for the reverse
stock split) per share of Class A Common Stock upon conversion of the debenture.
On March 5, 1999, the debentures were converted at the reduced conversion price
of $4.00 per share ($20.00 after adjustment for the September 1999 reverse stock
split). The market value of the additional conversion shares issued as a result
of the reduced conversion price was approximately $3,506,000.
Redeemable Convertible Preferred Stock
On December 4, 1997, the Company entered into a securities purchase
agreement to sell 19,000 of Series A Convertible Preferred Stock, $1.00 par
value, ("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 (75,000 after adjustment for
the reverse stock split). An additional 346,000 (69,200 after adjustment for the
reverse stock split) 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 (77,000 after adjustment for the reverse
stock split) 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 (383,561 after adjustment for the
September 1999 reverse stock split) 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 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. Since the Company was below the $2 million minimum net tangible assets
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 has recorded the Series B Convertible Preferred Stock at its
Redemption Price of $19.0 million and has recorded corresponding charges to net
loss available for common shareholders and accumulated deficit as of December
31, 1999. As such, the total accretion in 1999 aggregated approximately
$6,930,000.
F-19
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 December 31, 1999 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.
M. Other Arrangements
- -----------------------
In May 1997 the Company entered into an agreement whereby it became a
minority owner of uPACS(TM) LLC, a limited liability company (the "LLC"). Under
the terms of the agreement the Company made a capital contribution to the LLC of
its rights to its uPACS(TM) technology which is a system for archiving
ultrasound images with networking, communication and off-line measurement
capabilities. In exchange for such capital contribution, the Company received a
9% interest in the LLC. A then outside investor, who is currently a principal
shareholder of the Company, made an initial capital contribution of $2 million
and later made a further capital contribution of $1 million in return for a 91%
interest in the LLC. In connection with the formation of the LLC the Company
entered into a services and license agreement whereby the Company agreed to
complete the development of the uPACS(TM) technology and undertake to market,
sell, and distribute systems using the uPACS(TM) technology. The LLC agreed to
pay the Company its expenses in connection with such services and the Company
agreed to pay royalties to the LLC in connection with the sale of systems using
the uPACS technology. At such time as the LLC has distributed to the outside
investor an aggregate amount equal to $4.5 million of its net cash flow the
Company would become a 63% owner of the LLC and the outside investor would own a
37% interest in the LLC.
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. For the year ended December 31, 1999, the
Company paid approximately $0.7 million of the LLC's expenses. The Company
intends to continue funding the LLC operation only through the first quarter of
2000. Costs of funding the LLC after December 31, 1999 total less than $50,000.
F-20
N. Equity Transactions
- ------------------------
Common Stock
On April 16, 1998, the shareholders amended the Company's Certificate of
Incorporation to modify certain terms of the Class A Common Stock and Class B
Common Stock. The modifications to the terms of the Class A and Class B Common
Stock increased the exchange ratio for conversion of Class B Common Stock into
Class A Common Stock from 1:1 to 1:1.5; changed the voting rights of the Class A
Common Stock and the Class B Common Stock with respect to the election of
directors so that the directors of the Company will be elected by holders of
Class A Common Stock and Class B Common Stock voting together as a single class;
made the voting rights of both classes the same so that they have the same
voting power; eliminated a separate class vote of Class B Common Stock holders
on certain corporate transactions; and changed the dividend restriction so that
Class A Common Stock and Class B Common Stock receive the same dividends.
In December 1997, the National Association of Securities Dealers, Inc.
("NASD"), notified the Company that it proposed to de-list the Class B Common
Stock from NASDAQ SmallCap Market because the number of holders of Class B
Common Stock appeared to have fallen below 300 beneficial owners. The Company
proposed the amendments to alleviate certain negative impact of such de-listing
of the Class B Common Stock, and the NASD granted to the Company a temporary
exception, until May 1, 1998, in order to permit the Company to effect these
amendments. Following the close of business on May 1, 1998, the Class B Common
Stock was no longer listed on the NASDAQ SmallCap Market.
Also on April 16, 1998, the shareholders approved the adoption of three
equity plans and an increase in the authorized Class A Common Stock from 22
million shares to 40 million shares.
On November 10, 1998, the shareholders approved an increase in the
authorized Class A Common Stock from 40 million to 60 million shares and the
sale and issuance of up to 6,666,666 (1,333,333 after adjustment for the reverse
stock split) shares of Class A Common Stock at a purchase price of $3.00 ($15.00
after adjustment for the reverse stock split) per share, and Warrants to
purchase up to 1,000,000 shares (200,000 after adjustment for the reverse stock
split) of Class A Common Stock at an exercise price of $3.00 ($15.00 after
adjustment for the reverse stock split) per share.
In order to provide additional capital to the Company, the Company agreed to
sell 6,666,666 (1,333,333 after adjustment for the reverse stock split) shares
of Class A Common Stock at a purchase price of $3.00 ($15.00 after adjustment
for the reverse stock split) per share for aggregate proceeds of $20,000,000.
For each $1 million of Class A Common Stock purchased, the purchaser received
seven-year warrants to purchase 50,000 shares of Class A Common Stock,
exercisable at $3.00 ($15.00 after adjustment for the reverse stock split) per
share; a total of 1,000,000 (200,000 after adjustment for the reverse stock
split) warrants were, therefore, issued to the purchaser. The placement agent
also received warrants to purchase up to 250,000 (50,000 after adjustment for
the reverse stock split) shares of Class A Common Stock.
On September 10, 1999, the listing of Base Ten's common stock was
transferred from NASDAQ National Market System to the NASDAQ SmallCap Market.
Reverse Stock Split
On September 24, 1999, the Company executed a one-for-five reverse split of
the Company's Class A Common and Class B Common Stock. Under the terms of the
split, each shareholder received one share of Class A Common $5 par value stock
for every five shares, or fraction thereof, of Class A Common $1 par value stock
owned as of the transaction date. In addition, shareholders received one share
of Class B Common $5 par value stock for every five shares, or fraction thereof,
of Class B Common $1 par value stock owned as of September 24, 1999. As a result
of the reverse stock split, the Company retired 20,161,883 shares of Class A
Common Stock and 56,917 shares of Class B Common Stock. The prices for shares of
the Company's Class A Common Stock traded through the NASDAQ SmallCap Market
reflected the reverse stock split as of September 24, 1999, while trading of
Class B Common Stock on the Bulletin Board reflected the reverse stock split as
of November 8, 1999. All references in the consolidated financial statements to
shares and per share data have been adjusted retroactive to November 1, 1996 in
response to the reverse stock split.
F-21
O. Earnings Per Share
- ----------------------
The following is a reconciliation of the numerators and denominators used to
calculate loss per share in the Consolidated Statements of Operations (dollars
in thousands, except per share data):
- ------------------------------------------------------------------------------------------------------------------------------------
Two Months
Year Ended Year Ended Ended Year Ended
December 31, 1999 December 31, 1998 December 31, 1997 October 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Loss per common share-basic:
Net loss $ (20,240) $ (19,020) $ (3,936) $ (22,007)
Less: Dividends on Preferred Stock (262) (1,740) -- --
Accretion on Preferred Stock (6,930) (1,424) -- --
Plus: Credit on Exchange of Preferred Stock 445 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss to common shareholders (numerator) $ (26,987) $ (22,184) $ (3,936) $ (22,007)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares - basic (denominator) 4,624,000 2,124,000 1,652,000 1,579,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss per common share-basic $ (5.84) $ (10.45) $ (2.38) $ (13.94)
- ------------------------------------------------------------------------------------------------------------------------------------
Loss per common share-fully diluted:
Net loss $ (20,240) $ (19,020) $ (3,936) $ (22,007)
Less: Dividends on Preferred Stock (262) (1,740) -- --
Accretion on Preferred Stock (6,930) (1,424) -- --
Plus: Credit on Exchange of Preferred Stock 445 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss to common shareholders (numerator) $ (26,987) $ (22,184) $ (3,936) $ (22,007)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares 4,624,000 2,124,000 1,652,000 1,579,000
Effect of dilutive options / warrants -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares-fully diluted (denominator) 4,624,000 2,124,000 1,652,000 1,579,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss per common share-diluted $ (5.84) $ (10.45) $ (2.38) $ (13.94)
- ------------------------------------------------------------------------------------------------------------------------------------
Stock options, warrants and rights would have an anti-dilutive effect on
earnings per share for the years ended December 31, 1999 and 1998, the two month
period ended December 31, 1997 and the year ended October 31, 1997 and,
therefore, were not included in the calculation of fully diluted earnings per
share.
P. Stock Option Plans, Warrants and Rights
- --------------------------------------------
The Company's 1990 Incentive Stock Option Plan reserves 96,800 shares (after
adjustment for the reverse stock split) (after adjustment for the reverse stock
split) of either Class A or Class B Common Stock for purchase upon the exercise
of options that may not be granted at less than the fair market value as of the
date of grant and that are exercisable over a period not to exceed ten years.
There are no further shares available for option under this plan.
The Company's 1992 Incentive Stock Option Plan reserves 140,000 shares
(after adjustment for the reverse stock split) of Class A Common Stock for
purchase upon the exercise of options that may not be granted at less than fair
market value as of the date of grant and that are exercisable over a period not
to exceed ten years. There are no further shares available for option under this
plan.
The Company's Discretionary Deferred Compensation Plan reserves 230,000
shares (after adjustment for the reverse stock split) of Class A Common Stock
for issuance upon the exercise of options. There are no options available for
grant under this plan. Options may not be granted at less than fair market value
as of the date of grant and are exercisable over a period not to exceed ten
years.
The Company's 1995 Incentive Stock Option Plan reserves 150,000 shares
(after adjustment for the reverse stock split) of Class A Common Stock for
issuance upon the exercise of options. Options may not be granted at less than
fair market value as of the date of grant and are exercisable over a period not
to exceed ten years. There are no options available for grant under this plan.
The Company's Base Ten Stock Option Plan reserves 16,000 shares (after
adjustment for the reverse stock split) of Class A Common Stock for purchase
upon the exercise of options that may not be granted at less than fair market
value as of the date of grant and that are exercisable over a period not to
exceed ten years. There are no options available for grant under this plan.
F-22
The Company's 1998 Stock Option and Stock Award Plan reserves 642,409 shares
(after adjustment for the reverse stock split) of Class A Common Stock for
purchase upon the exercise of options. Options may not be granted at less than
fair market value as of the date of grant and are exercisable over a period not
to exceed ten years. This plan allows for the re-issuance of any canceled or
expired options. Approximately 286,000 options remain available for grant under
this plan.
A summary of the status of the Company's aforementioned stock option plans
as of October 31, 1997 and December 31, 1997, 1998 and 1999 and changes during
the periods ending on those dates is presented below:
- -------------------------------------------------------------------------------------------------------------------------------
Class A Class B
-----------------------------------------------------------------------------
Weighted- Weighted- Total
Number of Average Exercise Number of Average Exercise Number of
Shares Price Shares Price Shares
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at October 31, 1997 380,933 $ 48.30 989 $ 15.00 381,922
- ------------------------------------------------------------------------------------------------------------------------------------
Granted -- -- -- -- --
Exercised (10,117) 48.35 -- (10,117)
Canceled
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1997 370,816 48.25 989 $ 15.00 371,805
- ------------------------------------------------------------------------------------------------------------------------------------
Granted 509,220 14.70 -- 509,220
Exercised (25,046) 19.20 (989) 15.00 (26,035)
Canceled (80,865) 45.75 (80,865)
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 774,125 27.35 -- -- 774,125
- ------------------------------------------------------------------------------------------------------------------------------------
Granted 155,360 3.91 -- -- 155,360
Exercised (50) 17.50 -- -- (50)
Canceled (437,975) 24.74 -- -- (437,975)
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1999 491,460 22.27 -- -- 491,460
- ------------------------------------------------------------------------------------------------------------------------------------
Exercisable at December 31, 1999 344,720 $ 29.22 -- $ -- 344,720
- ------------------------------------------------------------------------------------------------------------------------------------
The following tables summarizes information about the stock options
outstanding at December 31, 1999:
- ----------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------- -------------------------------------
Weighted-Average
Number Remaining Number
Outstanding at Contractual Life Weighted-Average Exercisable at Weighted-Average
Range of Exercise Prices December 31, 1999 (in years) Exercise Price December 31, 1999 Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
$1.00 - $10.00 267,280 9.15 $6.71 138,550 $9.31
$12.50 - $20.00 29,816 5.79 $17.22 19,306 $17.46
$25.63 - $43.13 95,044 5.80 $34.68 87,544 $35.45
$51.25 - $58.16 99,320 6.99 $53.78 99,320 $53.78
- ----------------------------------------------------------------------------------------------------------------------------------
The Company's 1998 Employee Stock Purchase Program authorizes the issuance
of up to 200,000 shares of Class A Common Stock for purchase by Company
employees. Shares are purchased at 85% of the fair market value on standard
quarterly purchase dates as defined in the plan. Approximately 174,000 shares
were available for issuance and purchase at December 31, 1999.
At December 31, 1999, the Company has outstanding 761,709 warrants and
167,300 options to consultants and five non-management directors at prices
ranging from $3.906 to $90.00, expiring from 2000 to 2009. In 1999, 820,000
warrants and 162,000 options expired. The remaining options and warrants were
issued at fair market value at the date of grant.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("FAS 123") for its stock options plans for employees. Had compensation cost for
these plans been determined under FAS 123, the Company's net loss would have
been increased to $20,904,000, $20,192,000 and $24,898,000 with a net loss per
common share of $4.52, $2.20 and $3.22 for years ended December 31, 1999, 1998
and October 31, 1997, respectively. There were no options granted in the
two-month period ended December 31, 1997. For purposes of this calculation, the
fair value of each option grant was estimated on the grant date using the
Black-Scholes option-pricing model with the following assumptions: expected
volatility of between 43-77 percent; weighted average risk free interest rate of
between 5.08-6.35 percent; and weighted average expected lives of 1 to 5 years.
All options granted to date under the stock option plans for employees have an
exercise price equal to the market price of the Company's stock on the grant
date.
F-23
In addition, the Company has recorded charges to earnings for years ended
December 31, 1998 and October 31, 1997 of $322,000 and $2,750,000 respectively,
representing the value of the options and warrants issued to consultants. The
Company also incurred a charge of $543,000 in the two-month period ended
December 31, 1997 as a result of extending option expiration dates to terminated
employees of the GTD. These charges have been computed using the Black-Scholes
option-pricing model.
Q. Employee Benefit Plan
- --------------------------
The Company has a 401(k) plan which allows all eligible employees to defer
up to 17% of their pre-tax income through contributions to the plan. The plan
allows for a 1% base annual salary Company matching contribution for each
eligible employee. The Company's contribution was $47,000 and $51,000 for fiscal
years 1999 and 1998, respectively, $23,000 for the two-month period ended
December 31, 1997 and $34,000, in fiscal year 1997.
R. Discontinued Operations
- ----------------------------
On October 27, 1997 the Company entered into an agreement to sell the GTD to
Strategic Technology Systems, Inc. ("Strategic"). The sale between the Company
and Strategic was closed on December 31, 1997. Accordingly, the operating
results of the Government Technology Division have been segregated from
continuing operations and reported as a separate line item on the consolidated
statements of operations for all periods presented.
Results of operations of the GTD are as follows:
- ------------------------------------------------- --------------------- --------------------
Two Month Ended Year Ended October
December 31, 1997 31, 1997
- ------------------------------------------------- --------------------- --------------------
Net revenues $ -- $ 9,981
Cost and expenses 222 14,835
- ------------------------------------------------- --------------------- --------------------
The net loss on disposal of $1,173,000 for the year ended October 31, 1997
included a provision for estimated losses of the GTD of $1,068,000 through the
date of sale. The actual expenses of the GTD through the date of the sale
exceeded the provision for estimated losses by $222,000.
In accordance with the agreement between the Company and Strategic, and in
consideration for the value of the net assets sold, the Company received
$3,500,000 in cash, and an unsecured promissory note in a principal amount of
$1,975,000. The note has a five year term bearing interest at a rate of 7.5% per
annum. Principal payments under the note amortize over a three year period
beginning on the second anniversary of the closing dated December 31, 1997. The
terms of the note also provide for accelerated payments of principal and
interest pending 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.
F-24
S. Comprehensive Income (Loss)
- -------------------------------
The accumulated balances for each classification of comprehensive income
(loss) are as follows (dollars in thousands):
- ------------------------------------------------------ -------------------- ----------------- ---------------------
Unrealized Accumulated Other
Foreign Currency Gains (Loss) on Comprehensive
Items Securities Income (Loss)
- ------------------------------------------------------ -------------------- ----------------- ---------------------
Balance October 31, 1996 $ (159) $ 49 $ (110)
- ------------------------------------------------------- ------------------- ------------------ ---------------------
FY 1997 change 9 94 103
- ------------------------------------------------------- ------------------- ------------------ ---------------------
Balance October 31, 1997 (150) 143 (7)
- ------------------------------------------------------- ------------------- ------------------ ---------------------
1997 Transition Period change (45) (81) (126)
- ------------------------------------------------------- ------------------- ------------------ ---------------------
Balance December 31, 1997 (195) 62 (133)
- ------------------------------------------------------- ------------------- ------------------ ---------------------
FY 1998 change (55) (8) (63)
- ------------------------------------------------------- ------------------- ------------------ ---------------------
Balance December 31, 1998 (250) 54 (196)
- ------------------------------------------------------- ------------------- ------------------ ---------------------
FY 1999 change 127 (23) 104
- ------------------------------------------------------- ------------------- ------------------ ---------------------
Balance December 31, 1999 $ (123) $ 31 $ (92)
- ------------------------------------------------------- ------------------- ------------------ ---------------------
T. Related Party Transactions
- -------------------------------
Almedica International, Inc., a shareholder of the Company and the former
owner of BTS Clinical, Inc., is a customer of the Company. During 1999, the
company recorded revenues from Almedica International, Inc. of $236,000. Also,
see Note M for expenses incurred by the Company related to its investment in the
LLC.
U. Subsequent Events
- ----------------------
Subsequent to December 31, 1999, a contract to provide software and
services to one customer was 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 the project. Under
the terms of this contract, the Company was to receive revenues totaling
approximately $1.4 million. The termination of this contract will allow the
Company to reallocate resources to other projects requiring less substantial
customization. In addition, to reduce its dependence on the BASE10(R)ME and
BASE10(R)CS products, the Company plans to more aggressively market the
BASE10(R)ADLS, BASE10(R)ADMS and BASE10(R)FS products. While the timely delivery
of product to the Company's customers cannot be completely assured, management
believes the Company will be able to meet its remaining delivery commitments.
The financial statements reflect the impact of the terminated contract and
concerns over the delivery of BASE10(R)ME and BASE10(R)CS.
F-25
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, this 11th day of
April, 2000.
Base Ten Systems, Inc.
By:/s/ Stephen A. Cloughley By:/s/ William F. Hackett By: /s/ William F. Hackett
------------------------- ----------------------- -------------------------
Stephen A. Cloughley William F. Hackett William F. Hackett
Chief Executive Officer Chief Financial Officer Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the date indicated.
Title Date
Directors April 11, 2000
Stephen A. Cloughley
Alan S. Poole
John C. Rhineberger
By: /s/ William F. Hackett
-----------------------------------
William F. Hackett, as attorney-in-fact
48
Exhibit Index
Exhibit Number Exhibit Page
- -------------- ------- ----
2. (a) Asset Purchase Agreement between Registrant *(A)
and Strategic Technology Systems, Inc. dated
October 27, 1997, (incorporated by reference to
Exhibit 2.1 of Registrant's Current Report on Form
8-K (File No. 0-7100) dated November 17, 1997).
(b) Asset Purchase Agreement dated as of February 19, *
1998 by and among Base Ten FlowStream, Inc.,
Base Ten Systems, Inc. and Consilium, Inc.
(incorporated by reference to Exhibit 2(b) to
Registrants' Current Report on Form 8-K (File No.
0-7100) dated March 6, 1998).
3. (a) Restated Certificate of Incorporation, as *
amended, of Registrant (incorporated by
reference to Exhibit 4(a) to Amendment No. 1 to
Registrant's Registration Statement on Form S-8
(File No. 2-84451) filed on July 31, 1990).
(b) Certificate of Amendment of the Restated *
Certificate of Incorporation dated September 1,
1992 (incorporated by reference to Exhibit 4(b)(2)
to Amendment No. 3 to Registrant's Registration
Statement on Form S-1 (File No. 33-48404) filed on
September 3, 1992).
(c) Amended By-Laws of the Registrant (incorporated by *
reference to Exhibit 4(d)(2) to Registrant's
Registration Statement on Form S-8 (File No.
33-60454) filed on April 1, 1993).
(d) Certificate of Amendment of Restated Certificate *
of Incorporation filed December 2, 1997,
(incorporated by reference to Exhibit 99.3 of
Registrant's Current Report on Form 8-K (File No.
0-7100) dated October 27, 1997).
(e) Amended By-laws of Registrant dated October 13, *
1997 (incorporated by reference to Exhibit
10(ee) to Registrant's Annual Report on Form 10-K
(File No. 0-7100) for the fiscal year ended
October 31, 1997).
(f) Amendment to Certificate of Incorporation filed *
on March 31, 1998 (incorporated by reference to
Exhibit 3(d) to Registrants' Current Report on
Form 8-K (File No. 0-7100) dated April 23, 1998).
(g) Amendment to Certificate of Incorporation filed *
on April 21, 1998 (incorporated by reference to
Exhibit 3(e) to Registrants' Current Report on
Form 8-K (File No. 0-7100) dated April 23, 1998).
(h) Certificate of Amendment of Certificate of *
Incorporation dated June 30, 1998 filed with
the Treasurer of the State of new Jersey on July
9, 1998 (incorporated by reference to Exhibit
3(g) to Registrants' Current Report on Form 8-K
(File No. 0-7100) dated January 13, 1999).
(i) Certificate of Amendment of Certificate of *
Incorporation dated September 30, 1998 filed
with the Treasurer of the State of New Jersey on
October 13, 1998 (incorporated by reference to
Exhibit 3(h) to Registrants' Current Report on
Form 8-K (File No. 0-7100) dated January 13,
1999).
(j) Certificate of Amendment of Certificate of *
Incorporation dated November 18, 1998 filed
with the Treasurer of the State of new Jersey on
November 19, 1998 (incorporated by reference to
Exhibit 3(i) to Registrants' Current Report on
Form 8-K (File No. 0-7100) dated January 13,
1999).
49
Exhibit Index cont'd
Exhibit Number Exhibit Page
- -------------- ------- ----
(k) Certificate of Amendment of Certificate of *
Incorporation dated January 11, 1999 filed with
the Treasurer of the State of new Jersey on
January 11, 1999 (incorporated by reference to
Exhibit 3(j) to Registrants' Current Report on
Form 8-K (File No. 0-7100) dated January 13,
1999).
(l) Form of Certificate of Amendment of Restated *
Certificate of Incorporation providing for
designation, preferences and rights of the
Convertible Preferred Shares, Series B (Exhibit A
to the Exchange Agreement dated as of December
31, 1998) (incorporated by reference to Exhibit
10 (yy) to Registrants' Current Report on Form
8-K (File No. 0-7100) dated January 13, 1999)>
(m) Certificate of Amendment of Certificate of
Incorporation dated March 3, 1999 filed with the
Treasurer of New Jersey on March 4, 1999.
(n) Certificate of Correction to the Certificate of
Amendment of Restated Certificate of
Incorporation providing for designation,
preferences and rights of the Convertible
Preferred Shares, Series B, filed with the
Treasurer of the State of New Jersey on March 18,
1999.
4. (a) Purchase Agreement filed as of August 8, 1996 *
between the Registrant and Jesse L. Upchurch
(incorporated by reference to Exhibit 4 (a) to
Registrant's Current Report on Form 8-K (File No.
0-7100) dated August 12, 1996).
10. (a) 1980 Deferred Compensation Agreement between *(A)
the Registrant and certain executive
officers (incorporated by reference to Exhibit
10.3 to Registrant's Registration Statement on
Form S-1 File No. 2-70259 filed on December 16,
1980).
(b) 1981 Incentive Stock Option Plan of Registrant, as *(A)
amended and restated on January 12, 1990
(incorporated by reference to Exhibit 4(c) to
Amendment No. 1 to Registrant's Registration
Statement on Form S-8 (File No. 2-84451) filed on
July 31, 1990).
(c) 1992 Stock Option Plan of Registrant (incorporated *(A)
by reference to Exhibit 10(ai) to Amendment
No. 3 to Registrant's Registration Statement on
Form S-1 (File No. 33-48404) filed on September 3,
1992).
(d) Change in Control Agreement dated October 23, *(A)
1991 between Registrant and Myles M.
Kranzler (incorporated by reference to Exhibit
10(e) to Registrant's Annual Report on Form 10-K
(File No. 0-7100) for the fiscal year ended
October 31, 1991).
(e) Change in Control Agreement dated October 23, *(A)
1991 between Registrant and James A. Eby
(incorporated by reference to Exhibit 10(f) to
Registrant's Annual Report on Form 10-K (File No.
0-7100) for the fiscal year ended October 31,
1991).
(f) Change in Control Agreement dated October 23, *(A)
1991 between Registrant and Edward J.
Klinsport (incorporated by reference to Exhibit
10(f) to Registrant's Annual Report on Form 10-K
(File No. 0-7100) for the fiscal year ended
October 31, 1991).
50
Exhibit Index (con't)
Exhibit Number Exhibit Page
- -------------- ------- ----
(g) Employment Agreement dated as of March 26, 1992 *(A)
between the Registrant and Myles M. Kranzler
(incorporated by reference to Exhibit 28(b) to
Registrant's Current Report on Form 8-K (File No.
0-7100) filed on April 10, 1992).
(h) Employment Agreement dated as of March 26, 1992 *(A)
between the Registrant and James A. Eby
(incorporated by reference to Exhibit 28(c) to
Registrant's Current Report on Form 8-K (File No.
0-7100) filed on April 10, 1992).
(i) Employment Agreement dated as of March 26, 1992 *(A)
between the Registrant and Edward J.
Klinsport (incorporated by reference to Exhibit
28(d) to Registrant's Current Report on Form 8-K
(File No. 0-7100) filed on April 10, 1992).
(j) Employment Agreement dated as of March 26, 1992 *(A)
between the Registrant and Alan J.
Eisenberg (incorporated by reference to Exhibit
28(e) to Registrant's Current Report on Form 8-K
(File No. 0-7100) filed on April 10, 1992).
(k) Amended Agreement dated July 28, 1992 between the *(A)
Registrant and Alexander Adelson
(incorporated by reference to Exhibit 10(ar) to
the Registrant's Registration Statement on
Amendment No. 3. to Form S-2 on Form S-1
(Registration No. 33-48404) filed on September 3,
1992).
(l) Modification of Amended Agreement dated January *(A)
11, 1993 between the Registrant and
Alexander M. Adelson.
(m) Amended Modification of Amended Agreement dated *(A)
January 28, 1994 between the Registrant and
Alexander M. Adelson.
(n) Amended Consulting Agreement made as of February *(A)
24, 1992 between the Registrant and Bruce D.
Cowen (incorporated by reference to Exhibit 10(as)
to the Registrant's Registration Statement on
Amendment No. 3. to Form S-2 on Form S-1
(Registration No. 33-48404) filed on September 3,
1992).
(o) Modification of Amendment Agreement dated January *(A)
11, 1993 between the Registrant and Bruce D.
Cowen.
(p) Consulting Agreement dated March 1, 1994 between *(A)
the Registrant and Bruce D. Cowen.
(q) Option Agreement dated as of November 9, 1992 *
between the Registrant and Donald M. Daniels
(incorporated by reference to Exhibit 10(as) to
the Registrant's Annual Report on Form 10-K (File
No. 0-7100) for the fiscal year ended October 31,
1992).
(r) Option Agreement dated as of June 5, 1992 between *
the Registrant and Strategic Growth
International, Inc. (incorporated by reference to
Exhibit 10(at) to the Registrant's Annual Report
on Form 10-K (File No. 0-7100) for the fiscal year
ended October 31, 1992).
51
Exhibit Index (con't)
Exhibit Number Exhibit Page
- -------------- ------- ----
(s) Acquisition Agreement dated October 28, 1994 *
between the Registrant and CKR Partners, L.L.C.
(incorporated by reference to Exhibit 2(a) to
Registrant's Current Report on Form 8-K (File No.
0-7100) dated November 11, 1994).
(t) Lease dated October 28, 1994 between the *
Registrant and CKR Partners, L.L.C.
(incorporated by reference to Exhibit 10(b) to
Registrant's Current Report on Form 8-K (File No.
0-7100) dated November 11, 1994).
(u) Operating Agreement between the Registrant and *
Jesse L. Upchurch dated May 1, 1997
(incorporated by reference to Exhibit (u) of
Registrant's Current Report on Form 8-K (File No.
0-7100) dated May 1, 1997).
(v) License and Services Agreement between the *
Registrant and uPACS, L.L.C. dated May 1, 1997,
(incorporated by reference to Exhibit 10(v) of
Registrant's Current Report Form 8-K (File No.
0-7100) dated May 1, 1997).
(w) Compensation Agreement among uPACS, L.L.C., Andrew *(A)
Garret, Inc. and Andrew Sycoff dated May 1,
1997, (incorporated by reference to Exhibit 10(w)
of Registrant's Current Report on Form 8-K (file
No. 0-7100) dated May 1, 1997).
(x) Securities Purchase Agreement between the *
Registrant and certain purchasers dated May 30,
1997, (incorporated by reference to Exhibit 99.1
of Registrant's Current Report on Form 8-K (File
No. 0-7100) dated May 30, 1997).
(y) Convertible Term Debenture issued by the *
Registrant to certain purchasers dated May 30,
1997, (incorporated by reference to Exhibit 99.2
of Registrant's Current Report on Form 8-K (File
No. 0-7100) dated May 30, 1997).
(z) Stock Purchase Warrant issued by the Registrant *
to certain purchases dated May 30, 1997,
(incorporated by reference to Exhibit 99.3 of
Registrant's Current Report on Form 8-K (File No.
0-7100) dated May 30, 1997).
(aa) Registration Rights Agreement between the *
Registrant and certain purchasers dated May 30,
1997, (incorporated by reference to Exhibit 99.4
of Registrant's Current Report on Form 8-K (File
No. 0-7100) dated May 30, 1997).
(bb) Securities Purchase Agreement between the *
Registrant and certain purchasers dated
December 4, 1997, (incorporated by reference to
Exhibit 99.1 of Registrant's Current Report on
Form 8-K (File No. 0-7100) filed dated December
9, 1997).
(cc) Registration Rights Agreement between the *
Registrant and certain purchasers dated
December 4, 1997, (incorporated by reference to
Exhibit 99.1 of registrant's Current Report on
Form 8-K (File No, 0-7100) dated May 30 filed
December 9, 1997).
52
Exhibit Index (con't)
Exhibit Number Exhibit Page
- -------------- ------- ----
(dd) Common Stock Purchase Warrant issued by Registrant *
and certain purchasers dated December 4, 1997
(incorporated by reference to Exhibit 99.4 of
Registrant's Current Report Form 8-K (File No.
07100) dated December 9, 1997).
(ee) Warrant Agreement between Registrant and *(A)
Strategic Growth International dated April
15, 1997 (incorporated by reference to Exhibit
10(ee) to Registrant's Annual Report on Form 10-K
(File No. 0-7100) for the fiscal year ended
October 31, 1997).
(ff) Consultant Agreement between Registrant and RTS *(A)
Research Lab, Inc., dated June 9, 1997
(incorporated by reference to Exhibit 10(ff) to
Registrant's Annual Report on Form 10-K (File No.
0-7100) for the fiscal year ended October 31,
1997).
(gg) Warrant Agreement between Registrant and Strategic *(A)
Growth International, Inc. dated June 20,
1997 (incorporated by reference to Exhibit 10(gg)
to Registrant's Annual Report on Form 10-K (File
No. 0-7100) for the fiscal year ended October 31,
1997).
(hh) Option Agreement between Registrant and David C. *(A)
Batten dated October 13, 1997 (incorporated
by reference to Exhibit 10(hh) to Registrant's
Annual Report on Form 10-K (File No. 0-7100) for
the fiscal year ended October 31, 1997).
(ii) Option Agreement between Registrant and Alan S. *(A)
Poole dated October 13, 1997 (incorporated
by reference to Exhibit 10(ii) to Registrant's
Annual Report on Form 10-K (File No. 0-7100) for
the fiscal year ended October 31, 1997).
(jj) Employment Agreement between Registrant and *(A)
Thomas E. Gardner dated October 17, 1997
(incorporated by reference to Exhibit 10(jj) to
Registrant's Annual Report on Form 10-K (File No.
0-7100) for the fiscal year ended October 31,
1997).
(kk) Change of Control Agreement between Registrant *(A)
and Thomas E. Gardner dated October 17, 1997
(incorporated by reference to Exhibit 10(kk) to
Registrant's Annual Report on Form 10-K (File No.
0-7100) for the fiscal year ended October 31,
1997).
(ll) Performance-Based Stock Option Agreement between *(A)
Registrant and Thomas E. Gardner dated
October 17, 1997 (incorporated by reference to
Exhibit 10(ll) to Registrant's Annual Report on
Form 10-K (File No. 0-7100) for the fiscal year
ended October 31, 1997).
(mm) Service-Based Stock Option Agreement between *
Registrant and Thomas E. Gardner dated October
17, 1997 (incorporated by reference to Exhibit
10(mm) to Registrant's Annual Report on Form 10-K
(File No. 0-7100) for the fiscal year ended
October 31, 1997).
(nn) Separation and Consulting Agreement between *(A)
Registrant and Myles M. Kranzler dated
October 20, 1997 (incorporated by reference to
Exhibit 10(nn) to Registrant's Annual Report on
Form 10-K (File No. 0-7100) for the fiscal year
ended October 31, 1997).
53
Exhibit Index (con't)
Exhibit Number Exhibit Page
- -------------- ------- ----
(oo) Omnibus Convertible Term Debenture Holder Waiver *
and Consent Regarding Sale of the Government
Technology Division and Amendment No. 1 to
Convertible term Debenture between Registrant and
RGC International Investors, LDC and the Tail Wind
Fund, LTD., dated October 20, 1997 (incorporated
by reference to Exhibit 10(oo) to Registrant's
Annual Report on Form 10-K (File No. 0-7100) for
the fiscal year ended October 31, 1997).
(pp) Employment Agreement between Registrant and C. *(A)
Richard Bagshaw dated November 26, 1997
(incorporated by reference to Exhibit 10(pp) to
Registrant's Annual Report on Form 10-K (File No.
0-7100) for the fiscal year ended October 31,
1997).
(qq) Promissory Note from Strategic Technology Systems, *
Inc., to Registrant dated December 31, 1997
(incorporated by reference to Exhibit 10(gg) to
Registrant's Annual Report on Form 10-K (File No.
0-7100) for the fiscal year ended October 31,
1997).
(rr) Warrant Agreement between Registrant and Strategic *
Technology Systems, Inc., dated December 31,
1997 (incorporated by reference to Exhibit 10(rr)
to Registrant's Annual Report on Form 10-K (File
No. 0-7100) for the fiscal year ended October 31,
1997).
(ss) Transition Agreement between Registrant and *
Strategic Technology Systems, Inc., dated
December 31, 1997 (incorporated by reference to
Exhibit 10(ss) to Registrant's Annual Report on
Form 10-K (File No. 0-7100) for the fiscal year
ended October 31, 1997).
(tt) Sublease between Registrant and Strategic *
Technology Systems, Inc., dated December 31,
1997 (incorporated by reference to Exhibit 10(tt)
to Registrant's Annual Report on Form 10-K (File
No. 0-7100) for the fiscal year ended October 31,
1997).
(uu) Fifth Amendment to Lease between Registrant and *
CKR PARTNERS, L.L.C., dated December 31, 1997
(incorporated by reference to Exhibit 10(uu) to
Registrant's Annual Report on Form 10-K (File No.
0-7100) for the fiscal year ended October 31,
1997).
(vv) Consulting Agreement between Registrant and *(A)
Edward J. Klinsport dated December 31, 1997
(incorporated by reference to Exhibit 10(vv) to
Registrant's Annual Report on Form 10-K (File No.
0-7100) for the fiscal year ended October 31,
1997).
(ww) Stock Purchase Agreement dated as of November 12, *
1998 by and between Base Ten Systems, Inc. and
Jesse L. Upchurch (incorporated by reference to
Exhibit 3(d) to Registrants' Current Report on
Form 8-K (File No. 0-7100) dated November 20,
1998).
(xx) Exchange Agreement dated as of December 31, 1998 *
by and between Base Ten Systems, Inc. and the
holders of the outstanding Series A, Convertible
Preferred Stock (incorporated by reference to
Exhibit 10(xx) to Registrants' Current Report on
Form 8-K (File No. 0-7100) dated January 13,
1999).
54
Exhibit Index (con't)
Exhibit Number Exhibit Page
- -------------- ------- ----
(yy) Form of Certificate of Amendment of Restated *
Certificate of Incorporation providing for
designation, preferences and rights of the
Convertible preferred Shares, Series B (Exhibit A
to the Exchange Agreement dated as of December 31,
1998) (incorporated by reference to Exhibit 10(yy)
to Registrants' Current Report on Form 8-K (File
No. 0-7100) dated January 13, 1999).
(zz) Form of Common Stock Purchase Warrant Certificate *
(Exhibit B to the Exchange Agreement dated as
of December 31, 1998) (incorporated by reference
to Exhibit 10(zz) to Registrants' Current Report
on Form 8-K (File No. 0-7100) dated January 13,
1999).
(aaa) Form of Common Stock Purchase Warrant Certificate *
9Exhibit C to the Exchange Agreement dated as
of December 31, 1998) (incorporated by reference
to Exhibit 10(aaa) to Registrants' Current Report
on Form 8-K (File No. 0-7100) dated January 13,
1999).
(bbb) Irrevocable Consent dated December 22, 1998 by *
the holder of the Company's 9.01% Convertible
Subordinated Debentures (incorporated by
reference to Exhibit 10(bbb) to Registrants'
Current Report on Form 8-K (File No. 0-7100)
dated January 13, 1999).
(ccc) Offer Letter by the Registrant to C. Richard *(A)
Bagshaw dated November 26, 1997
(incorporated by reference to Exhibit 10(ccc) to
Registrants' Annual Report on Form 10-K (File No.
0-7100) dated April 15, 1999).
(ddd) Change in Control Agreement between the *(A)
Registrant and C. Richard Bagshaw dated
January 13, 1998 (incorporated by reference to
Exhibit 10(ddd) to Registrants' Annual Report on
Form 10-K (File No. 0-7100) dated April 15,
1999).
(eee) Offer Letter by the Registrant to William F. *(A)
Hackett dated December 8, 1997 (incorporated
by reference to Exhibit 10(eee) to Registrants'
Annual Report on Form 10-K (File No. 0-7100)
dated April 15, 1999).
(fff) Change in Control Agreement between the *(A)
Registrant and William F. Hackett dated May
26, 1998 (incorporated by reference to Exhibit
10(fff) to Registrants' Annual Report on Form
10-K (File No. 0-7100) dated April 15, 1999).
(ggg) Employment Termination Agreement between the *
Registrant and Thomas E. Gardner dated October
28, 1999 (incorporated by reference to
Registrants' Current Report on Form 8-K (File No.
0-7100) dated April 12, 2000).
(hhh) Employment Agreement between the Registrant and *(A)
Stephen A. Cloughley dated October 28, 1999
(incorporated by reference to Registrants'
Current Report on Form 8-K (File No. 0-7100)
dated April 12, 2000).
(iii) Termination Agreement between the Registrant and
Robert J. Bronstein dated as of March 31, 2000.
55
21. Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
23.2 Independent Auditors' Consent.
24.1 Power of Attorney.
27.1 Financial Data Schedule for the fiscal year ended
December 31, 1999, submitted to the Securities and
Exchange Commission in electronic format.
- ---------------
* Incorporated by reference.
(A) A management contract or compensatory plan or arrangement.
56