SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from November 1, 1997 to December 31, 1997
Commission File No. 0-7100
BASE TEN SYSTEMS, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-1804206
---------------------- ---------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
One Electronics Drive
Trenton, N.J. 08619
------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 586-7010
-------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. YES /x/ NO /_/
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date.
Title of Class Outstanding at February 28, 1998
-------------- --------------------------------
Class A Common Stock, $1.00 par value 7,854,068
Class B Common Stock, $1.00 par value 445,121
BASE TEN SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
Part I. Financial Information Page
Consolidated Balance Sheets -- December 31, 1997 (unaudited)
and October 31, 1997 (audited)..................................... 1
Consolidated Statements of Operations -- Two months ended
December 31, 1997 and three months ended
January 31, 1997.(unaudited)....................................... 2
Consolidated Statements of Shareholders' Equity -- Two
months ended December 31, 1997 (unaudited)......................... 3
Consolidated Statements of Cash Flows -- Two months ended
December 31, 1997 and three months ended
January 31, 1997.(unaudited)....................................... 4
Notes to Consolidated Financial Statements......................... 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 10
Part II. Other Information
Item 2: Changes in Securities............................... 16
Item 4: Submission of Matters to a Vote of Security Holders. 17
Item 6: Exhibits and Reports on Form 8-K.................... 17
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
As of As of
December 31, 1997 October 31, 1997
----------------- ----------------
(Unaudited) (Audited)
CURRENT ASSETS:
Cash.................................................................. $ 9,118,000 $ 1,502,000
Accounts receivable (including unbilled receivables of
$1,186,000 at December 31, 1997 and $1,444,000 at October 31, 1997). 1,583,000 1,808,000
Inventories........................................................... 321,000 478,000
Net assets held for sale.............................................. -- 5,338,000
Other current assets.................................................. 530,000 566,000
------------ ------------
TOTAL CURRENT ASSETS................................................ 11,552,000 9,692,000
PROPERTY, PLANT AND EQUIPMENT............................................... 4,346,000 4,305,000
RECEIVABLE FROM SALE OF ASSETS.............................................. 2,238,000 --
OTHER ASSETS................................................................ 6,380,000 7,220,000
------------ ------------
$ 24,516,000 $ 21,217,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................................... $ 282,000 $ 962,000
Accrued expenses....................................................... 5,399,000 6,005,000
Current portion of capital lease obligation............................ 54,000 54,000
------------ ----------
TOTAL CURRENT LIABILITIES............................................ 5,735,000 7,021,000
LONG TERM LIABILITIES:
Long-term debt......................................................... 15,500,000 15,500,000
Capital lease obligation............................................... 3,416,000 3,425,000
Other long-term liabilities............................................ 245,000 253,000
------------ ----------
TOTAL LONG-TERM LIABILITIES.......................................... 19,161,000 19,178,000
SHAREHOLDERS' EQUITY (DEFICIENCY)
Preferred stock, $1.00 par value,
1,000,000 shares authorized; issued and outstanding 9,375 shares
at December 31, 1997................................................. 9,000 --
Class A Common Stock, $1.00 par value,
22,000,000 shares authorized; issued and outstanding 7,828,719
shares at December 31, 1997 and 7,768,952 shares at October 31, 1997. 7,829,000 7,769,000
Class B Common Stock, $1.00 par value,
2,000,000 shares authorized; issued and outstanding 445,121
shares at December 31 and October 31, 1997........................... 445,000 445,000
Additional paid-in capital............................................. 37,991,000 29,458,000
Deficit................................................................ (46,521,000) (42,647,000)
------------ -----------
(247,000) (4,975,000)
Equity adjustment from foreign currency translation.................... (195,000) (150,000)
Unrealized gain on securities available for sale....................... 62,000 143,000
------------ -----------
(380,000) (4,982,000)
------------ -----------
$ 24,516,000 $ 21,217,000
============ ===========
See Notes to Consolidated Financial Statements
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Two Months Ended Three Months Ended
December 31 January 31
----------- ------------------
1997 1997
---- ----
REVENUE
Sales................................................... $ 181,000 $ 230,000
Other................................................... 115,000 94,000
--------------- ---------------
296,000 324,000
--------------- ---------------
COSTS AND EXPENSE:
Cost of sales........................................... 1,371,000 329,000
Amortization of software development costs.............. 567,000 343,000
Research and development................................ 25,000 14,000
Selling, general and administrative..................... 1,211,000 982,000
Interest................................................ 312,000 362,000
--------------- ---------------
3,486,000 2,030,000
--------------- ---------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT (3,190,000) (1,706,000)
INCOME TAX BENEFIT........................................... -- --
--------------- ---------------
NET LOSS FROM CONTINUING OPERATIONS.......................... (3,190,000) (1,706,000)
--------------- ---------------
DISCONTINUED OPERATIONS:
LOSS FROM DISCONTINUED OPERATIONS............................ (684,000) (289,000)
--------------- ----------------
NET LOSS..................................................... $ (3,874,000) $ (1,995,000)
=============== ================
LOSS PER COMMON SHARE:
Continuing Operations.................................. (.39) (.22)
Discontinued Operations................................ (.08) (.04)
--------------- ----------------
NET LOSS PER COMMON SHARE................................... (.47) (.26)
=============== ================
WEIGHTED AVERAGE COMMON SHARES.............................. 8,258,000 7,808,000
LOSS PER COMMON SHARE-ASSUMING DILUTION:
Continuing Operations.................................. (.39) (.22)
Discontinued Operations................................ (.08) (.04)
--------------- ----------------
NET LOSS PER COMMON SHARE-ASSUMING DILUTION.................. (.47) (.26)
=============== ================
WEIGHTED AVERAGE COMMON SHARES-ASSUMING DILUTION............. 8,258,000 7,808,000
--------------- ----------------
See Notes to Consolidated Financial Statements
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
TWO MONTHS ENDED DECEMBER 31, 1997
(Unaudited)
Equity
Adjustment Unrealized
From Gain on
Common Stock Preferred Stock Additional Foreign Securities
Class A Class B Paid-in Currency Available
Shares Amount Shares Amount Shares Amount Capital Deficit Translation for Sale
------ ------ ------ ------ ------ ------ ------- ------- -------- -----------
Balance-
October 31, 1997 7,768,952 7,769,000 445,121 $ 445,000 -- -- $29,458,000 $(42,647,000) $(150,000) $ 143,000
Conversions of
Class B Common
to Class A Common -- -- -- -- -- -- -- -- -- --
Exercise of options 50,584 51,000 -- -- -- -- 445,000 -- -- --
Issuance of Common
Stock 9,183 9,000 -- -- -- -- 102,000 -- -- --
Issuance of
Preferred Stock -- -- -- -- 9,375 9,000 7,986,000 -- -- --
Foreign currency
translation -- -- -- -- -- -- -- -- (45,000) --
Unrealized gain on
securities
available for sale -- -- -- -- -- -- -- -- -- (81,000)
Net loss -- -- -- -- -- -- -- (3,874,000) -- --
--------- ---------- ------- -------- -------- ------ ----------- ------------ ---------- -------
Balance -
December 31, 1997 7,828,719 $7,829,000 445,121 $ 445,000 9,375 $ 9,000 $37,991,000 $(46,521,000) $(195,000) $(62,000)
========= ========== ======= ========= ======== ======= =========== ============= ========== ==========
See Notes to Consolidated Statements
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Two Months Ended Three Months Ended
December 31 January 31
----------- ------------------
1997 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................................... $ (3,874,000) $ (1,995,000)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization..................................................... 612,000 545,000
CHANGES IN OPERATING ASSETS AND LIABILITIES, EXCLUDING EFFECTS OF DISCONTINUED BUSINESS:
Accounts receivable............................................................... 225,000 942,000
Inventories....................................................................... 157,000 27,000
Employee loan receivable net of current portion................................... --- 23,000
Other current assets.............................................................. 36,000 (120,000)
Accounts payable and accrued expenses............................................. 552,000 (77,000)
Deferred compensation............................................................. --- 5,000
Other assets...................................................................... 192,000 (1,428,000)
Other long-term liabilities....................................................... -- 144,000
Income taxes payable.............................................................. -- --
---------- ----------
NET CASH USED IN OPERATIONS....................................................... (2,100,000) (1,934,000)
---------- ----------
CASH FLOWS USED IN INVESTING
ACTIVITIES:
Additions to property, plant and equipment-net.................................... (86,000) (207,000)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES............................................. (86,000) (207,000)
---------- ----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from sale of discontinued business....................................... 3,500,000 --
Receivable from sale of discontinued business..................................... (2,238,000) --
Repayment of amounts borrowed..................................................... (17,000) (10,000)
Issuance of long-term debt........................................................ -- --
Proceeds from issuance of common and preferred stock.............................. 8,602,000 40,000
---------- ----------
NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES............................. 9,847,000 30,000
Effect of exchange rate changes on cash........................................... (45,000) (81,000)
---------- ----------
NET INCREASE (DECREASE) IN CASH......................................................... 7,616,000 (2,192,000)
CASH, beginning of period............................................................... 1,502,000 7,465,000
---------- ----------
CASH, end of period..................................................................... $ 9,118,000 $ 5,273,000
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest.......................................... $ 88,000 $ 130,000
----------- ------------
See Notes to Consolidated Financial Statements
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWO MONTHS ENDED DECEMBER 31, 1997
(Unaudited)
A. Description of Business
Base Ten Systems, Inc. ("Base Ten" or the "Company") is engaged in the
development of commercial applications focused on manufacturing execution
systems, medical screening and image processing software. For the period ended
December 31, 1997, the Company was also engaged, through its Government
Technology Division, in the design and manufacture of electronic systems
employing safety critical software for the defense industry. Effective December
31, 1997, the Government Technology Division was sold by the Company. See Note E
below.
B. Summary of Significant Accounting Policies
1. In management's opinion, all adjustments necessary for a fair
presentation of the financial statements are reflected in the
accompanying statements.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
The consolidated interim financial statements should be read in
conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1997. The results of operations
for the two months ended December 31, 1997 are not necessarily
indicative of the operating results for the full year.
2. Basis of Presentation - The consolidated financial statements
include the accounts of Base Ten and its subsidiaries. All
significant inter-company accounts, transactions and profits
have been eliminated. As discussed more thoroughly in Note E,
the results of operations of the Government Technology Division
have been reported separately as discontinued operations for all
periods presented. Net assets of the GTD were sold to Strategic
Technology Systems, Inc. ("STS") at the close of business on
December 31, 1997 and as such are not presented at December 31,
1997 only. Net assets of the GTD are reported as net assets held
for sale at October 31, 1997.
3. Recently Issued Accounting Standards - The Company has adopted
Statement of Financial Accounting Standard No. 128, "Earnings
Per Share" ("FAS 128"), which was issued by the Financial
Accounting Standards Board. FAS 128 requires the Company to
present Basic Earnings Per Share which excludes dilution and
Diluted Earnings Per Share which includes potential dilution.
The Company believes that the adoption of FAS 128 will not have
a material effect on the Company's earnings per share
calculations.
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income," which is
effective for financial statement periods beginning after
December 15, 1997. This statement establishes standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The Company believes that
the information to be included in deriving comprehensive income,
although not currently presented in a separate financial
statement, is disclosed as part of these financial statements.
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" which is effective for financial statement
periods beginning after December 15, 1997. This statement
establishes standards for the way that public business
enterprises report information about operating segments in
annual financial statements and requires that these enterprises
report selected information about operating segments in interim
financial reports issued to shareholders. This Statement
supersedes SFAS No. 14 and amends SFAS No. 94. The Company is
currently evaluating the impact to its current financial
statements of the implementation of SFAS 131.
4. Net Loss Per Share
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard ("FAS") No.
128, "Earnings per Share". FAS No. 128 specified the
computation, presentation and disclosure requirements for
earnings per share ("EPS") and became effective for both interim
and annual periods ending after December 15, 1997. All prior
period EPS data has been restated to conform with the provisions
of FAS No. 128. The following is a reconciliation of the
numerators and denominators used to calculate loss per share
before extraordinary loss in the Consolidated Statements of
Operations:
Two Months Ended Three Months Ended
December 31, January 31,
---------------------------------------
1997 1997
------------ -------------
Loss per common share:
Loss before extraordinary loss (numerator).......................... $ (3,874,000) $ (1,995,000)
Weighted average shares (denominator)............................... 8,258,000 7,808,000
Loss before extraordinary loss.................................. (.47) (.26)
============ =============
Loss per common share-assuming dilution:
Loss before extraordinary loss (numerator).......................... $ (3,874,000) $ (1,995,000)
Weighted average shares............................................. 8,258,000 7,808,000
Effect of Dilutive Options/Warrants................................. -- --
------------ -------------
Weighted averages shares-assuming dilution (denominator)........ 8,258,000 7,808,000
Loss before extraordinary loss.................................. (.47) (.26)
============ =============
During the two months ended December 31, 1997 and the three
months ended January 31, 1997 there were no outstanding options
included in the computation of diluted EPS as the Company had a
net loss, and the effect of stock options, warrants and stock
conversions would be anti-dilutive to earnings per share.
5. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these
estimates.
6. Investments - The Company accounts for its investments using
Statement of Financial Accounting Standard No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("FAS No.
115"). This standard requires that certain debt and equity
securities to 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, 1997
and October 31, 1997, all securities covered by FAS No. 115 were
designated as available for sale. Accordingly, these securities
are stated at fair value, with unrealized gains and losses
reported in a separate component of shareholders' equity.
Securities available for sale at December 31, 1997 and October
31, 1997, consisted of common stock with a cost basis of $50,000
and $150,000. Differences between cost and market of $62,000 and
$143,000 were included as a separate component of shareholder's
equity, "unrealized gain on securities available for sale", as
of December 31 and October 31, 1997, respectively.
7. Reclassifications - Certain reclassifications have been made to
prior year financial statements to conform to the current year
presentation.
C. Inventories
December 31, 1997 October 31, 1997
----------------- ----------------
Raw materials................... $ 23,000 $ 32,000
Work in progress................ 182,000 252,000
Finished goods.................. 146,000 201,000
---------- -----------
351,000 485,000
Less advance payments........... 30,000 7,000
---------- -----------
$ 321,000 $ 478,000
========== ===========
D. Sale of Convertible Preferred Stock
During December 1997 the Company sold and issued $19 million of
convertible preferred stock ("Preferred Stock") and Class A Stock
purchase warrants (the "Warrants"). Initially the Company sold and
issued $9.375 million of Preferred Stock and Warrants as of December 5,
1997, to several institutional investors. On December 31, 1997, after
obtaining shareholder approval, the Company sold and issued a second
installment of $9.625 million of Preferred Stock and Warrants to
complete the $19 million sale and issuance. The second installment of
$9.625 million was received as cash in January 1998.
The Preferred Stock has a term of three years and pays a cumulative
dividend of 8.0% per annum during any quarter in which the closing bid
price for the Class A Stock is less than $8.00 for any ten consecutive
trading days. An equivalent payment is payable to any holder of
Preferred Stock which is subject during any quarter to a standstill
period following a Company underwritten public offering or which is
non-convertible because of the limitations described below. Such
dividends and payments are payable only prior to conversion and payable
in cash or additional Preferred Stock at Base Ten's option; however, if
the Company elects to pay the dividend in Preferred Stock, the amount
of such payment will be 125% of the cash amount.
The Preferred Stock has a liquidation preference as to its principal
amount and any accrued and unpaid dividends.
The Preferred Stock is convertible at any time or from time to time
into Class A Stock, at a conversion price equal to the lesser of (i)
$16.25 per share or (ii) the Weighted Average Price (as defined) of the
Class A Stock prior to the conversion date. In any event, no more than
3,040,000 shares of Class A Stock shall be issued upon conversion of
all of the Preferred Stock. Any Preferred Stock remaining outstanding
because of this limitation may be redeemed at the holder's option for a
subordinated 8% promissory note maturing when the Preferred would have
matured. The Company has the right, at any time, to redeem all or any
part of the outstanding Preferred Stock or subordinated notes at 130%
of their original purchase price, subject to certain limitations.
Any shares of Preferred Stock or subordinated notes still outstanding
three years after issuance must be redeemed in either cash, or at the
Company's option, in Class A Stock. If the Company elects to make the
redemption in Class A Stock, the amount of such payment will be 125% of
the original purchase price.
The holders of the Preferred Stock have the same voting rights as the
holders of Class A Stock, calculated as if all outstanding shares of
Preferred Stock had been converted into shares of Class A Stock on the
record date for determination of shareholders entitled to vote on the
matter presented.
For each $1 million of Preferred Stock purchased, purchasers received
five-year warrants to purchase 40,000 shares of Class A Stock
exercisable at $16.25 per share. If exercised these would represent an
additional 760,000 shares of Class A Stock or up to an aggregate of
3,800,000 shares of Class A Stock resulting from this sale (subject to
adjustment in certain circumstances), assuming conversion of all
Preferred Stock and exercise of all warrants.
A registration statement ("Registration Statement") filed with the
Securities and Exchange Commission ("SEC") registering for resale the
Class A Stock underlying the Preferred Stock, including any Preferred
Stock which may be issued as a dividend, and the Warrants, was declared
effective by the SEC on February 19, 1998. The holders have agreed, if
requested by a managing underwriter, to a maximum 90-day standstill
period following any underwritten Company public offering, but not in
excess of two such standstills (or more than 90 days) in any 18-month
period. In the event a standstill period is effective, the maturity
date of the Preferred Stock would be extended by the duration of the
standstill period.
E. Discontinued Operations
On October 27, 1997 the Company entered into an agreement to sell
its Government Technology Division ("GTD") to Strategic Technology
Systems, Inc. ("STS"). Accordingly, the operating results of the GTD
have been segregated from continuing operations and reported as a
separate line item on the consolidated statements of operations for all
periods presented.
The net assets of the GTD were sold to STS at the close of business
on December 31, 1997, and as such are not presented at December 31,
1997. The net assets of the GTD are included in the consolidated balance
sheet as of October 31, 1997 under "Net Assets Held For Sale." The
composition of the net assets at October 31, 1997 is as follows:
------------------------------------------------------------------------
Net Assets of the GTD to be sold to STS as of October 31, 1997
------------------------------------------------------------------------
Current assets $ 6,105,000
Property and equipment-net 631,000
Current liabilities (1,398,000)
--------------
TOTAL NET ASSETS $ 5,338,000
==============
The agreement between the Company and STS, in general, requires that
the selling price of the net assets, on the closing date of December
31, 1997, be equal to the lower of the aggregate net asset value as of
October 31, 1997 or December 31, 1997. As of the filing date of this
Form 10-Q, the Company and STS have not agreed on the final net asset
valuation as of December 31, 1997. As a result, the Company has
recorded a receivable from STS at December 31, 1997 based on the agreed
upon net asset value at October 31, 1997. The Company does not
currently anticipate a material adverse effect to its financial
statements as presented herein as a result of this treatment of the net
asset valuation and related amounts receivable from STS. If the Company
and STS cannot agree on the final valuation of the net assets at
December 31, 1997, the agreement provides for an arbitration process
which would require two independent audit firms to make the final
determination. If these two audit firms cannot come to agreement, they
would choose a third independent audit firm to decide the final net
asset value as of December 31, 1997.
In consideration for the value of the net assets sold, the Company
received $3,500,000 in cash, and will receive an unsecured promissory
note in a principal amount equal to the difference between (i) amount of
the net assets of GTD as of the closing date plus $400,000, and (ii)
$3,500,000. The note will have a five year term bearing interest at a
rate of 7.5% per annum. Principal payments under the note will amortize
over a three year period beginning on the second anniversary of the
closing. The note also provides for accelerated payment of principal and
interest upon the occurrence of certain events.
In addition, the Company will receive a $400,000 contingent payment
provided STS is in receipt of a certain order from one of its customers.
The amount will be payable $100,000 per fiscal quarter beginning three
months after STS receives such order.
The Company will also receive a warrant from STS exercisable for
that number of shares of the voting common stock of STS which equals 5%
of the issued and outstanding shares of common stock and common stock
equivalents immediately following and giving effect to any initial
underwritten public offering by STS. In the event that STS is sold,
merged or liquidated prior to any such initial underwritten public
offering, the Company will receive 15% of the gross proceeds of such
transaction that are in excess of $7 million, and the warrant described
above will be cancelled.
The Company has subleased to STS approximately 30,000 square feet
plus allowed the use of 10,000 square feet of common areas for a period
of five years at an annual rental of $240,000 for the first three years
and $264,000 for each of the last two years of the sublease.
F. Subsequent Events
On January 29, 1998 the Board of Directors approved a change of its
fiscal reporting period to a year end of December 31 from the previous
year end of October 31.
On February 11, 1998 the Company filed a Registration Statement on Form
S-3, in which certain stockholders of the Company offered for sale
4,942,900 shares of Class A Common Stock. Of the shares offered,
4,250,000 shares are issuable relative to the conversion of outstanding
convertible Series A Preferred Stock and Warrants issued
contemporaneously with the Series A Preferred Stock. The remaining
692,900 shares are issuable relative to the exercise of outstanding
warrants or options issued to certain stockholders for services rendered
to the Company, approximately one half of which were in connection with
the sale of the Warrants issued contemporaneously with the Series A
Preferred Stock. The Registration Statement was declared effective by
the Securities and Exchange Commission on February 19, 1998.
On February 18, 1998 the Company announced that its Board of Directors
had recommended, for approval by shareholders at its 1998 Annual Meeting
certain changes to the status of its two classes of common stock. The
recommendation is to raise the voting power of Class A common stock from
1/10th of a vote per share to 1 vote per share, to allow holders of
Class B common stock to exchange their shares for Class A shares at a
conversion ratio of 1.5 shares of Class A issued for every 1 share of
Class B converted, compared to the current conversion ratio of 1:1, to
eliminate class voting on the election of directors, thereby allowing
all common stock to vote together in parity, to eliminate a separate
vote by Class B holders on certain corporate transactions, and to change
the dividend restriction for Class B stock. Shareholder approval will
require the affirmative vote of two-thirds of the votes cast at the
Annual Meeting by each of (i) the holders of the Class A stock voting as
a separate class, (ii) the holders of the Class B stock voting as a
separate class, and (iii) the holders of the Class A stock, Class B
stock, and Series A Preferred Stock voting together as a group. Class B
stock in any case will no longer be listed on Nasdaq Small Cap effective
May 1, 1998.
On February 19, 1998 the Company purchased the assets of Consilium
Inc.'s Health Care & Process business unit for a cash consideration of
$1.5 million and the assumption of certain maintenance and warranty
obligations.
On March 3, 1998 the Company dismissed Deloitte & Touche LLP as the
principal accountant to audit the Company's financial statements. This
dismissal was not the result of any disagreement or dispute concerning
accounting or auditing matters or other matters.
On March 13, 1998 the Company appointed Price Waterhouse LLP as its
principal accountant to audit the Company's financial statements for the
transition period from November 1, 1997 to December 31, 1997, and for
the fiscal year ending December 31 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
During 1997 the Company operated a Medical Technology Division (the
"MTD"), and a Government Technology Division (the "GTD"). On December 31, 1997,
following approval by shareholders, the Company sold the GTD (the "GTD Sale") to
Strategic Technology Systems, Inc. ("STS"). On January 29, 1998, the Company
elected to change its fiscal year so that the annual accounting period will
henceforth be from January 1 through December 31. This Quarterly Report on Form
10-Q, for the transition period from November 1, 1997 to December 31, 1997, will
not include, except as indicated herein, the operations of the GTD.
STS is a newly formed corporation managed and partially owned by
individuals who were, prior to the GTD Sale, members of the Company's senior
management (the "Management Group"). Members of the Management Group were
significantly involved in the business and development of the GTD while employed
by the Company and left the Company's employ to join STS concurrently with the
GTD Sale. STS acquired substantially all of the operating assets of the GTD in
exchange for certain consideration and the assumption of certain liabilities,
pursuant to the terms and conditions set forth in an Asset Purchase Agreement
between the Company and STS dated October 27, 1997 (the "Asset Purchase
Agreement"). The Asset Purchase Agreement was filed as an exhibit to the Current
Report on Form 8-K filed by the Company with the Securities and Exchange
Commission on November 11, 1997.
The consolidated financial statements of the Company have been restated
in order to account for the operations of the GTD as discontinued operations in
view of the GTD Sale. In the restatement, all items of income and expense
attributable to GTD's operations for all periods presented have been eliminated
from consolidation and accounted for on a net basis as discontinued operations.
All assets and liabilities of the GTD were sold to STS at the close of business
on December 31, 1997, and as such are not presented at December 31, 1997.
Accordingly, the following discussion of the Company's financial condition and
the results of operations excludes the results of the discontinued operations,
except as otherwise indicated.
In February 1998 the Company purchased certain assets from Consilium,
Inc. Refer to "Continuing Operations Overview" below for more information about
this acquisition.
Continuing Operations Overview
Since 1991 the Company has been engaged in the development of products
for the regulated manufacturing industry and, most recently, computerized
Manufacturing Execution Systems ("MES") for the pharmaceutical and medical
device industries. The Company believes the demand for MES in these markets is
poised for significant growth over the next several years for a number of
reasons.* First, there is growing pressure upon the Company's customer base for
compliance with regulations promulgated by the FDA, the International Standards
Organization (ISO 9000), and other industry standards such as Good Automated
Manufacturing Practices ("GAMP"). Second, there are increasing competetive
influences brought on by the business combinations occurring in the customer
market and the purchasing power for customer products among HMOs and other
benefit programs.
The Company believes that the PHARMASYST product is a premier,
standardized PC-based system running on Microsoft Windows-NT with requisite
functionality and documented support required by the pharmaceutical and medical
device industries to assist in reducing costs while remaining FDA, ISO 9000, and
GAMP compliant. The Company believes that the acquisition of certain assets from
Consilium, Inc. in February 1998 further broadens the Company's reach into these
industries with the addition of the FlowStream product, a UNIX-based MES
targeted at pharmaceutical, medical device and specialty chemical customers. The
Company will continue to pursue a leadership position in this market, and
intends to explore other potential opportunities for growth in other regulated
areas such as food, cosmetics, and chemical industries through ongoing
investment in these MES products.*
The Company has received indications from customers and prospects that
compliance with industry standards is an imperative to sales. As such, efforts
have been focused on compliance with certain industry standards and the Company
believes that both PHARMASYST and FlowStream are compliant with FDA, ISO 9000,
and GAMP.* As described above, there is a need for pharmaceutical and
medical device manufacturers to have MES products compliant with current Good
Manufacturing Practices (cGMP) as established by the FDA. Further, the Company
considers the additional costs of compliance with ISO 9000 and GAMP to be
prudent investments.*
The installation of MES is a complex process involving integration of
existing hardware platform and systems. A significant factor in successful field
installation is the ability of the customer personnel to understand the system,
and, in addition to participating in the required training, to accommodate the
difference between standard paper systems and electronic methodology. In
addition, the system must undergo rigorous testing after installation and may
require an extended period of modifications to fully comply with customer
requirements, some of which may be at the Company's expense.*
For use in a manufacturing environment, the system generally has to
undergo validation in accordance with defined procedures determining its fitness
for use in a regulated environment. The Company currently has two PHARMASYST
systems installed and validated, one at a medial device manufacturing plant and
the other at a pharmaceutical manufacturing plant. There are 14 validated
FlowStream installations at various customer sites. One additional PHARMASYST
product and one PHARM2 product are believed to have completed customer testing
necessary for validation but have not been formally declared validated by the
customer.
In order to address the needs of the dynamic environment of the
Company's customers, the Company must look to continually enhance compliance to
industry standards. The Company believes that revenue recognition can be
accelerated by incorporating greater functionality in both PHARMASYST and
FlowStream, thereby reducing the amount of customization at each customer
installation. This reduction in customization could result in shortened time
between order placement and subsequent revenue recognition.*
Personnel are already 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.*
Contracts to deliver software which require significant customization
or modification for an extended period of time are accounted for under the
percentage of completion method. For products or orders which are more
standardized in nature, revenue is recognized on delivery. In 1996, the Company
determined that its PHARM2(TM) product had become standardized and, generally,
PHARM2(TM) license fees are recognized as revenue upon delivery of standard
PHARM2(TM); revenue for customization is recognized on a percent completion
basis; and revenue from other services is recognized as rendered.
Software development expenditures are expensed as research and
development until a product attains technological feasibility. Thereafter,
expenditures are capitalized until products attain commercial viability. The
Company established technological feasibility for PHARMASYST(R) in 1993. At
December 31, 1997 and including development of PHARM2(TM), PHARMASYST(R) had a
capitalized value of $4.1 million after allowing for amortization. Development
expenditures for PHARMASYST(R) and other commercial products have consisted
primarily of salaries of software engineers and quality assurance staff plus
applicable allocated overhead. The amortization period for PHARMASYST(R) and
PHARM2(TM) is scheduled to be completed by June 1999 and until then will have a
significant effect on earnings.
Results of Discontinued Operations
During the two-month period ended December 31, 1997, the GTD, after
application of loss reserves created previously, incurred losses of $0.7
million. Refer to Note E for more details on the GTD and its sale to Strategic
Technolgy Systems, Inc. operations.
Two Months ended December 31, 1997 compared with Three Months ended January 31,
1997
Continuing Operations
Revenues
Company revenues were $0.3 million in the two months ended December 31,
1997 as compared to $0.3 in the three months ended January 31, 1997. Revenues
were below expectations, primarily due to delays in completing software tasks.
The Company currently anticipates releasing the next version of its MES product
in May 1998 with resulting sales arising in the second half of 1998.*
Cost of Sales
Cost of sales during the two-month 1997 period increased significantly
to $1.4 million from $0.3 million in the quarter ended January 31, 1997,
primarily due to salary and labor-related expenses for software development
being largely expensed as incurred in the two months ended December 31, 1997, as
opposed to the quarter ended January 31, 1997 when salaries were primarily
capitalized. In the November-December 1997 period, salary and labor-related
expenses in cost of sales were approximately $0.9 million.
Amortization of Software Development Costs
Amortization of capitalized software increased in the two month period
ended December 31, 1997 to $0.6 million as compared to $0.3 million in the
quarter ended January 31, 1997. This increase is attributable to the greater
capitalization level of software costs in November-December 1997 versus the
quarter ended January 31, 1997, combined with the lower amount of remaining
amortizable months available to spread capitalized costs over in
November-December 1997, as compared to the period ended January 31, 1997.
Research and Development Costs
Research and development costs were level at approximately $25,000 or
less for both of the comparative periods. Research and development costs are
incurred to develop future additions to the Company's current product family.
Selling, General and Administrative Expenses
Company selling, general and administrative expenses increased in the
two-month period ended December 31, 1997 to $1.2 million, from $1.0 million in
the quarter ended January 31, 1997. This rise was mainly due to increases in
professional fees and administrative salary and related expenses.
Interest Expense
Interest expense in the two-month period ended December 31, 1997 was
$0.3 million, as compared to $0.4 million in the quarter ended January 31, 1997.
Monthly interest expense has increased as a result of the Company incurring
additional debt in May 1997. In the period ended January 31, 1997, the Company
had $10 million in debt; in the November-December 1997 period, the Company had
debt of $15.5 million. Included in interest expense in each period is $0.1
million of interest on the capitalized building lease maintained by the Company.
Continuing Losses
The Company incurred a loss from continuing operations before taxes of
$3.2 million in the two months ended December 31, 1997, compared to a $1.7
million loss for the quarter ended January 31, 1997. The increased loss was
primarily due to low revenues, coupled with a significant increase in cost of
sales, more specifically, the increased software development salary and
labor-related expenditures of $0.9 million, which are primarily being expensed,
and not capitalized, as in the period ended January 31, 1997. Amortization
expense also increased significantly to $0.6 million, compared to $0.3 million
in the period ended January 31, 1997. The Company expects additional losses in
1998, including amortization expense currently estimated to be $3.3 million.*
The Company's ability to achieve profitable operations is dependent upon, among
other things, the completion of current development and testing activities for
PHARM2 and FlowStream, timely delivery and successful installation and
validation of its systems by its customers, and successful competition in the
markets in which the Company participates.*
Readiness for the Year 2000
The Company has taken actions to understand the nature and extent of
the work required to make its systems and infrastructure Year 2000 compliant.
The Company currently does not believe that it has any material Year 2000
problem with its products and believes, based on available information, that it
will be able to manage its total Year 2000 transition without any material
adverse effect on business operations or financial prospects. While no
assurances can be given, the Company anticipates converting all of its present
infrastructure software systems to currently available software products which
are already Year 2000 compliant. The Company cannot anticipate the impact of
suppliers and vendors non-compliance with the Year 2000.*
Discontinued Operations
During the two-month period ended December 31, 1997, the GTD, after
application of loss reserves of $1.2 million, incurred a net loss of $0.7
million, compared to a net loss of $0.3 million in the quarter ended January 31,
1997.
Liquidity and Capital Resources
On December 31, 1997 the Company received a cash payment of $3,500,000
from STS, related to the sale of the GTD net assets to STS. Refer to Note D of
the Notes to Consolidated Financial Statements for more information regarding
the sale of assets of the GTD to STS.
Also, in December 1997, the Company sold two installments of the sale
of an aggregate of $19 million of convertible preferred stock ("Preferred
Stock") and Class A Common Stock Purchase Warrants (the "Warrants"). In December
1997, the Company received cash of $8.0 million related to the first installment
of the $19 million sale of Preferred Stock and Warrants. The $8.0 million cash
received was net of financing fees of $1.0 million and legal fees of $0.4
million, both of which covered fees for the first and second installments of the
$19 million sale. The second installment of $9.6 million was received as cash in
January 1998. Refer to Note D and Item 2 of Part II for more information
regarding the terms of the Preferred Stock.
The Company currently believes that cash to be generated by operations
and existing capital resources will be sufficient to fund its operations through
the end of fiscal 1998. However, in this respect the Company is relying on its
leading products, PHARM2(TM) and FlowStream to stimulate new orders. Neither the
additional development of the Company's MES products nor the consequential
generation of cash can be assured either in time or amount or 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 1999, the Company may elect to seek additional
sources of capital and may also elect to reduce the pace of its development of
its products or establish other cost reduction measures, which could adversely
impact the Company. In the event the Company elects to seek additional capital
there can be no assurance that such funds or capital would be available on the
terms or in the amounts needed.*
*Forward Looking Statement
The foregoing contains forward looking information within the meaning
of The Private Securities Litigation Reform Act of 1995. Such forward looking
statements and paragraphs may be identified by an "asterisk" ("*") or by such
forward looking terminology as "may", "will", "believe", "anticipate", or
similar words or variations thereof. Such forward looking statements involve
certain risks and uncertainties including the particular factors described below
in the MD&A Section and throughout this report and in each case actual results
may differ materially from such forward looking statements. Successful marketing
of PHARM2(TM) and its future contribution to Company revenues depends heavily
on, among other things, successful early completion of current test efforts and
the necessary corrections to the software permitting timely delivery to
customers, none of which can be assured. Other important factors that the
Company believes may cause actual results to differ materially from such forward
looking statements are discussed in the "Risk Factors" sections in the Company's
Registration Statement on Form S-3 (File No. 333-46095) as well as current and
previous filings with the Securities and Exchange Commission. In assessing
forward looking statements contained herein, readers are urged to read carefully
those statements and other filings with the Securities and Exchange Commission.
The Company does not undertake to publicly update or revise its forward looking
statements even if experience or future changes make it clear that any projected
results or events (expressed or implied) will not be realized.
PART II. OTHER INFORMATION
Item 2: Changes in Securities
During December 1997 the Company sold and issued $19 million of
convertible preferred stock ("Preferred Stock") and Class A Stock purchase
warrants (the "Warrants"). Initially the Company sold and issued $9.375 million
of Preferred Stock and Warrants as of December 5, 1997, to several institutional
investors. On December 31, 1997, after obtaining shareholder approval, the
Company sold and issued a second installment of $9.625 million of Preferred
Stock and Warrants to complete the $19 million sale and issuance. The second
installment of $9.625 million was received as cash in January 1998. The
Preferred Stock and Warranty were issued pursuant to the exemption offered by
Regualtion 806 of Regulation D.
The proceeds of the sale of the Preferred Stock are being used for, and
are expected to continue to be used for, continuing development of the Company's
MES products, increased marketing activities, working capital and acquisition
financing. The Company paid Shoreline Pacific and Cowen & Company, placement
agents for the Preferred Shares, and aggregate of $997,500 in placement fees and
issued to the placement agents warrants to purchase an aggregate of 101,300
Class A Stock at an exercise price of $15.625 per share. The Company also paid
Strategic Growth International, Inc., a financial advisory fee of $435,000 and
issued to Strategic warrants purchase 140,000 Class A Stock. Mr. Alexander M.
Adelson, a director of the Company and Co-Chairman of the Board, received a
financial advisory fee of $190,000 and warrants to purchase 90,000 shares of
Class A Stock.
The Preferred Stock has a term of three years and pays a cumulative
dividend of 8.0% per annum during any quarter in which the closing bid price for
the Class A Stock is less than $8.00 for any ten consecutive trading days. An
equivalent payment is payable to any holder of Preferred Stock which is subject
during any quarter to a standstill period following a Company underwritten
public offering or which is non-convertible because of the limitations described
below. Such dividends and payments are payable only prior to conversion and
payable in cash or additional Preferred Stock at Base Ten's option; however, if
the Company elects to pay the dividend in Preferred Stock, the amount of such
payment will be 125% of the cash amount.
The Preferred Stock has a liquidation preference as to its principal
amount and any accrued and unpaid dividends.
The Preferred Stock is convertible at any time or from time to time
into Class A Stock, at a conversion price equal to the lesser of (i) $16.25 per
share or (ii) the Weighted Average Price (as defined) of the Class A Stock prior
to the conversion date. In any event, no more than 3,040,000 shares of Class A
Stock shall be issued upon conversion of all of the Preferred Stock. Any
Preferred Stock remaining outstanding because of this limitation may be redeemed
at the holder's option for a subordinated 8% promissory note maturing when the
Preferred would have matured. The Company has the right, at any time, to redeem
all or any part of the outstanding Preferred Stock or subordinated notes at 130%
of their original purchase price, subject to certain limitations.
Any shares of Preferred Stock or subordinated notes still outstanding
three years after issuance must be redeemed in either cash, or at the Company's
option, in Class A Stock. If the Company elects to make the redemption in Class
A Stock, the amount of such payment will be 125% of the original purchase price.
The holders of the Preferred Stock have the same voting rights as the
holders of Class A Stock, calculated as if all outstanding shares of Preferred
Stock had been converted into shares of Class A Stock on the record date for
determination of shareholders entitled to vote on the matter presented.
For each $1 million of Preferred Stock purchased, purchasers received
five-year warrants to purchase 40,000 shares of Class A Stock exercisable at
$16.25 per share. If exercised these would represent an additional 760,000
shares of Class A Stock or up to an aggregate of 3,800,000 shares of Class A
Stock resulting from this sale (subject to adjustment in certain circumstances),
assuming conversion of all Preferred Stock and exercise of all warrants.
A registration statement ("Registration Statement") filed with the
Securities and Exchange Commission ("SEC") registering for resale the Class A
Stock underlying the Preferred Stock, including any Preferred Stock which may be
issued as a dividend, and the Warrants, was declared effective by the SEC on
February 19, 1998. The holders have agreed, if requested by a managing
underwriter, to a maximum 90-day standstill period following any underwritten
Company public offering, but not in excess of two such standstills (or more than
90 days) in any 18-month period. In the event a standstill period is effective,
the maturity date of the Preferred Stock would be extended by the duration of
the standstill period.
Item 4: Submission of Matters to a Vote of Security Holders.
On December 31, 1997, the GTD Sale, the issuance of additional
securities, and the extension of certain option plans were approved by the
Company's shareholders at a Special Meeting of Shareholders.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits - (27) Financial Data Schedule (Edgar filing only.)
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on November 11, 1997,
for the sale of all the assets, subject to certain liabilities, of the Company's
Government Technology Division.
The Company filed a Current Report on Form 8-K, on December 18, 1997,
for the sale of the first installment of the sale of $19 million of Convertible
Preferred Shares.
The Company filed a Current Report on Form 8-K on January 9, 1998, for
the completion of the sale of the Government Technology Division and for the
second and final installment of the sale of $19 million of Convertible Preferred
Shares.
The Company filed a Current Report on Form 8-K dated January 29, 1998,
filed February 2, 1998, reporting the Company's change in fiscal year.
The Company filed a Current Report on Form 8-K dated February 19, 1998,
filed March 6,1998, reporting the Company's execution of a Definitive Purchase
Agreement with Consilium, Inc. under which the Company purchased the assets of
Consilium's Health Care and Process business unit for a cash consideration of
$1.5 million and the assumption of certain maintenance and warranty obligations.
The Company filed a Current Report on Form 8-K dated March 3, 1998,
filed March 9, 1998, reporting the dismissal of Deloitte & Touche LLP as the
principal accountant to audit the Company's financial statements.
The Company filed a Current Report on Form 8-K dated March 13, 1998,
filed March 16, 1998, reporting the appointment of Price Waterhouse LLP as the
principal accountant to audit the Company's financial statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 16, 1998
BASE TEN SYSTEMS, INC.
(Registrant)
By: /s/ THOMAS E. GARDNER
------------------------------------------------
Thomas E. Gardner
Co-Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ WILLIAM F. HACKETT
------------------------------------------------
William F. Hackett
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 16, 1998
BASE TEN SYSTEMS, INC.
(Registrant)
By: /s/ THOMAS E. GARDNER
------------------------------------------------
Thomas E. Gardner
Co-Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ WILLIAM F. HACKETT
------------------------------------------------
William F. Hackett
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)