SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1999 Commission File No. 0-7100
BASE TEN SYSTEMS, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-1804206
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(State of incorporation) (I.R.S. Employer Identification No.)
One Electronics Drive
Trenton, N.J. 08619
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 586-7010
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. YES /x/ NO /_/
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date.
Title of Class Outstanding at August 4, 1999
-------------- -----------------------------
Class A Common Stock, $1.00 par value 25,181,857
Class B Common Stock, $1.00 par value 71,144
Base Ten Systems, Inc.
And Subsidiaries
Index
Part I. Financial Information Page
Item 1: Financial Statements
Consolidated Balance Sheets - June 30, 1999 (unaudited)
and December 31, 1998 (audited).................................................................... 1
Consolidated Statements of Operations -- Three and six months
ended June 30, 1999 and 1998 (unaudited)........................................................... 2
Consolidated Statements of Shareholders' Equity - Six
months ended June 30, 1999 (unaudited)............................................................. 3
Consolidated Statements of Cash Flows -- Six months ended
June 30, 1999 and 1998 (unaudited)................................................................. 4
Notes to Consolidated Financial Statements......................................................... 5
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................................ 12
Item 3: Quantitative and Qualitative Disclosures About Market Risk ................................ 18
Part II. Other Information
Item 4: Submission of Matters to a Vote of Security Holders................................... 19
Item 6: Exhibits and Reports on Form 8-K...................................................... 19
Item 1. Financial Statements
Base Ten Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share and per share data)
June 30 December 31
1999 1998
(unaudited) (audited)
---------------------------------
Assets
Current Assets:
Cash and cash equivalents............................................... $ 10,331 $ 17,437
Accounts receivable, net................................................ 2,999 2,372
Other current assets.................................................... 557 639
---------------------------------
Total Current Assets................................................. 13,887 20,448
Property, plant and equipment, net......................................... 4,920 5,026
Note receivable............................................................ 1,975 1,975
Other assets............................................................... 9,031 6,372
=================================
Total Assets......................................................... $ 29,813 $ 33,821
=================================
Liabilities, Redeemable Convertible Preferred Stock, and Shareholders' Equity
Current Liabilities:
Accounts payable........................................................ $ 756 $ 984
Accrued expenses........................................................ 2,370 3,152
Deferred revenue........................................................ 1,547 756
Current portion of financing obligation................................. 109 74
---------------------------------
Total Current Liabilities............................................ 4,782 4,966
Long Term Liabilities:
Long term debt.......................................................... -- 10,000
Financing obligation.................................................... 3,274 3,341
Other long term liabilities............................................. 223 228
---------------------------------
Total Long Term Liabilities.......................................... 3,497 13,569
Commitments and Contingencies
Redeemable Convertible Preferred Stock:
(994,202 total shares of preferred stock authorized):
Series A Preferred Stock, $1.00 par value, issued and outstanding 14,942
shares at December 31, 1998; aggregate liquidation value of $14,942 at
December 31, 1998.................................................... -- 12,914
Series B Preferred Stock, $1.00 par value, issued and outstanding 15,203
shares at June 30, 1999; aggregate liquidation value of $15,203 at
June 30, 1999........................................................ 12,636 --
---------------------------------
Total Redeemable Convertible Preferred Stock......................... 12,636 12,914
---------------------------------
Shareholders' Equity:
Class A Common Stock, $1.00 par value, 60,000,000 shares authorized; issued
and outstanding 25,181,857 shares at June 30, 1999 and
18,659,748 at December 31, 1998...................................... 25,182 18,660
Class B Common Stock, $1.00 par value, 2,000,000 shares authorized;
issued and outstanding 71,144 shares at June 30, 1999 and
71,410 at December 31, 1998.......................................... 71 71
Additional paid-in capital.............................................. 63,779 52,885
Accumulated deficit..................................................... (79,510) (68,767)
---------------------------------
9,522 2,849
Accumulated other comprehensive income (loss) .......................... (343) (196)
Treasury Stock, 100,000 shares of Class A Common Stock, at cost......... (281) (281)
---------------------------------
Total Shareholders' Equity (Deficiency) ............................. 8,898 2,372
---------------------------------
Total Liabilities, Redeemable Convertible Preferred Stock, and
Shareholders' Equity ................................................ $ 29,813 $ 33,821
=================================
Base Ten Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
(dollars in thousands, except share and per share data)
Three months ended Six months ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
License and related revenue....................... $ 154 $ 598 $ 770 $ 968
Services and related revenue...................... 862 1,454 1,915 1,994
--------------------------------------- --------------------------------------
1,016 2,052 2,685 2,962
Cost of revenues.................................. 1,270 3,643 2,765 6,050
Research and development.......................... 436 194 895 334
Selling and marketing............................. 1,541 1,017 2,959 2,182
General and administrative........................ 1,853 1,892 4,049 3,246
Non-cash debt conversion charge................... -- -- 3,506 --
--------------------------------------- --------------------------------------
5,100 6,746 14,174 11,812
--------------------------------------- --------------------------------------
Loss before other income (expense)
and income tax benefit....................... (4,084) (4,694) (11,489) (8,850)
Other income (expense), net....................... 138 (204) 84 (443)
--------------------------------------- --------------------------------------
Net loss from continuing operations............... (3,946) (4,898) (11,405) (9,293)
Discontinued Operations:
Gain from sale of discontinued operations......... 1,044 -- 1,044 --
--------------------------------------- --------------------------------------
Net loss.......................................... (2,902) (4,898) (10,361) (9,293)
Less: Dividends on Redeemable
Convertible Preferred Stock.................. -- (458) (262) (933)
Accretion on Redeemable
Convertible Preferred Stock.................. (282) -- (564) --
Credit on Exchange of Redeemable
Convertible Preferred Stock.................. -- -- 445 --
======================================= ======================================
Net loss available for common shareholders $ (3,184) $ (5,356) $ (10,742) $ (10,226)
======================================= ======================================
Basic and diluted net gain (loss) per share
Continuing Operations.........................$ (0.19) $ (0.59) $ (0.57) $ (1.17)
Discontinued Operations....................... 0.05 -- 0.05 --
======================================= ======================================
$ (0.14) $ (0.59) $ (0.52) $ (1.17)
======================================= ======================================
Weighted average common shares
outstanding - basic and diluted.............. 22,157,000 9,132,800 20,839,000 8,732,700
Base Ten Systems, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity (Deficiency)
(unaudited)
(dollars in thousands)
Additional
Class A Class B Paid-In
Common Stock Common Stock Capital
Shares Amount Shares Amount
========================== ============ ============ ============ ============ ===========
Balance at
December 31, 1998 ........ 18,659,748 $ 18,660 71,410 $ 71 $ 52
========================== ========== ========== ========== ============ =========
Conversions:
Common B to
Common A ............. 399 -- (266) -- --
Preferred A to
Common A ............. 28,695 29 -- -- (29)
Debenture to
Common A ............. 2,500,000 2,500 -- -- 10,609
Issuance of
Common Stock:
Acquisition of
Almedica Technology
Group ................ 3,950,000 3,950 -- -- (370)
Employee stock
purchase plan ........ 42,765 43 -- -- 8
Exercise of options .. 250 -- -- -- --
Dividends on Redeemable
Preferred Stock .......... -- -- -- -- --
Accretion on Redeemable
Preferred Stock .......... -- -- -- -- --
Credit on exchange of
redeemable convertible
preferred stock .......... -- -- -- -- 676
Comprehensive
Income (Loss):
Net loss ............. -- -- -- -- --
Foreign currency
translation .......... -- -- -- -- --
Unrealized gain
(loss) on securities
available for sale ... -- -- -- -- --
Total Comprehensive
Income (Loss) ............ -- -- -- -- --
========================== ========== ========== ========== ============ ==========
Balance at
June 30, 1999 ............ 25,181,857 $ 25,182 71,144 $ 71 $ 63,779
========================== ========== ========== ========== ============ =========
Accumulated
Other
Comprehensive Total
Accumulated Income Treasury Stock Shareholders
Deficit (Loss) Shares Amount Equity
--------- ---------- ---------- ------------ -----------
Balance at
December 31, 1998 ........ $ (68,767) $ (196) (100,000) $ (281) $ 2,372
========================== ========== ========== ========== ============ ==========
Conversions:
Common B to
Common A ............. -- -- -- -- --
Preferred A to
Common A ............. -- -- -- -- --
Debenture to
Common A ............. -- -- -- -- 13,109
Issuance of
Common Stock:
Acquisition of
Almedica Technology
Group ................ -- -- -- -- 3,580
Employee stock
purchase plan ........ -- -- -- -- 51
Exercise of options .. -- -- -- -- --
Dividends on Redeemable
Preferred Stock .......... (262) -- -- -- (262)
Accretion on Redeemable
Preferred Stock .......... (565) -- -- -- (565)
Credit on exchange of
redeemable convertible
preferred stock .......... 445 -- -- -- 1,121
Comprehensive
Income (Loss):
Net loss ............. (10,361) -- -- -- (10,361)
Foreign currency
translation .......... -- (133) -- -- (133)
Unrealized gain
(loss) on securities
available for sale ... -- (14) -- -- (14)
Total Comprehensive
Income (Loss) ............ -- -- -- -- (10,508)
========================== ========== ========== ========== ============ ==========
Balance at
June 30, 1999 ............ $ (79,510) $ (343) (100,000) $ (281) $ 8,898
========================== ========== ========== ========== ============ ==========
See Notes to the Consolidated Financial Statements
Base Ten Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
(in thousands, except share and per share data)
Six Months Six Months
Ended Ended
June 30, 1999 June 30, 1998
- ----------------------------------------------------------------------------- -------------------- ---------------------
Cash Flows from Operating Activities:
Net loss from continuing operations .......................... $ (11,405) $ (9,293)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating
Activities:
Depreciation and amortization................................ 1,445 2,192
Non-cash debt conversion charge.............................. 3,506 --
Unrealized loss on investment in securities.................. 14 --
Changes in operating assets and liabilities: ...........................
Accounts receivable........................................... (446) (1,633)
Other current assets.......................................... 141 4
Accounts payable, accrued expenses and deferred revenue....... (1,196) (1,617)
- ----------------------------------------------------------------------------- -------------------- ---------------------
Net Cash Used in Operations............................................. (7,941) (10,347)
- ----------------------------------------------------------------------------- -------------------- ---------------------
Cash Flows from Investing Activities:
Additions to property, plant and equipment ................... (64) (860)
Additions to capitalized software costs and other assets...... -- (1,346)
Purchase of assets related to FlowStream product ............. -- (2,068)
Acquisition of Almedica, net of cash required ................ (75) --
- ----------------------------------------------------------------------------- -------------------- ---------------------
Net Cash Used in Investing Activities................................... (139) (4,274)
- ----------------------------------------------------------------------------- -------------------- ---------------------
Cash Flows from Financing Activities:
Proceeds from sale of discontinued operations................. 1,044 --
Repayment of amounts borrowed................................. (32) (45)
Proceeds from issuance of redeemable preferred stock.......... -- 9,625
Proceeds from issuance of common stock........................ -- 668
- ----------------------------------------------------------------------------- -------------------- ---------------------
Net Cash Provided from Financing Activities............................. 1,059 10,248
- ----------------------------------------------------------------------------- -------------------- ---------------------
Effect of Exchange Rate Changes on Cash................................. (85) (41)
- ----------------------------------------------------------------------------- -------------------- ---------------------
- ----------------------------------------------------------------------------- -------------------- ---------------------
Net (Decrease)/Increase In Cash and Cash Equivalents.................... (7,106) (4,414)
Cash, beginning of period............................................... 17,437 9,118
- ----------------------------------------------------------------------------- -------------------- ---------------------
Cash, end of period..................................................... $ 10,331 $ 4,704
- ----------------------------------------------------------------------------- -------------------- ---------------------
- ----------------------------------------------------------------------------- -------------------- ---------------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest................................ $ 396 $ 706
A. Basis of Presentation and Liquidity
The Company's financial statements have been prepared on the basis that it
will continue as a going concern. The Company has incurred significant
operating losses and negative cash flows in recent years. Also, at December
31, 1998 the Company was below the $4 million minimum net tangible assets,
as defined, required for its current listing on the NASDAQ National Market
System. In March 1999, the Company's shareholders' equity was increased by
approximately $9.6 million through the conversion of its $10 million
convertible debenture into common stock. As a result of this conversion, the
Company's net tangible assets rose above the $4.0 million minimum to $7.4
million at March 31, 1999. Coincident with that debt conversion, the
Company's Series A Redeemable Convertible Preferred Stock was exchanged for
Series B Redeemable Convertible Preferred Stock. These Preferred Stocks have
certain Redemption Events, which if such events occurred, would provide the
holder with the right to require the Company to purchase their shares for
cash which would adversely affect the Company. See Note E to the
Consolidated Financial Statements. Accordingly, where these rights exist
such redeemable securities are categorized outside of shareholders' equity
and, thus, may not qualify as equity for the purposes of the NASDAQ minimum
net tangible asset requirement. Also, security holders may have other
rights/claims in connection with the March 1999 transactions described
above.
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. At a
hearing before the NASD in July 1999 the Company appealed the NASD's
determination. The Company presented information to support its view that
the Company was in compliance and presented a plan for continued compliance
with the NASDAQ NMS continued listing criteria. The NASD has not yet
informed the Company of its determination following the hearing.
To further increase the Company's net tangible assets and in order to help
further ensure the Company's compliance with NASDAQ listing requirements,
management is in the process of negotiating with all participants in the
March 1999 Preferred Stock exchange to obtain waivers of any redemption or
rescission rights. These waivers, if obtained, would eliminate cash
redemption rights where the redemption event is beyond the control of the
Company. This would qualify all related securities for classification in
permanent stockholders' equity and increase the Company's qualifying net
tangible assets. If such waivers are obtained, then management believes that
the Company's current liquidity would be sufficient to meet its cash needs
for its existing business through fiscal 1999. However, there can be no
assurance that management's efforts in this regard will be successful.
If management is not successful in obtaining such waivers, and it continues
to incur operating losses it could fall below the minimum net asset
requirement needed to qualify for continued listing on NASDAQ NMS.
Management's plans in this regard include, among other things, (i)
attempting to improve operating cash flow through increased license sales
and service revenue, and (ii) increasing the level of anticipated
streamlining of its selling, administration and development functions.
However there is no assurance that such plans, if implemented, will be
sufficient.
If current cash and working capital reduced by cash used in operations in
1999 is not sufficient to satisfy the Company's liquidity and minimum net
tangible asset requirements, the Company will seek to obtain additional
equity financing. Additional funding may not be available when needed or on
terms acceptable to the Company. If the Company were required to raise
additional financing for the matters described above and/or to continue to
fund expansion, develop and enhance products and service, or otherwise
respond to competitive pressures, there is no assurance that adequate funds
will be available or that they will be available on terms acceptable to the
Company. Such a limitation could have a material adverse effect on the
Company's business; financial condition or operations and the financial
statements do not include any adjustment that could result therefrom.
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"). Our software systems aid our customers in complying
with FDA guidelines and improve our customer's overall productivity. The
Company's software systems include BASE10(TM) ME and BASE10(TM) FS, which
are "management execution systems." BASE10(TM) ME uses Windows NT operating
systems and BASE10(TM) FS uses HP-UX and Digital VAX/VMS operating systems.
The Company's software systems also include BASE10(TM) CS, BASE10TMADLS and
BASE10TMADMS, which are "clinical supplies management systems." These
software systems assist manufacturers in production during various phases of
clinical trials. BASE10(TM) CS uses Windows NT operating systems.
BASE10(TM)ADLS and BASE10(TM)ADMS, formerly known as ADLS and ADMS,
respectively, were acquired from Almedica International, Inc. See Note D. to
the Consolidated Financial Statements. The Company's software systems
primarily target three FDA regulated industries: (1) human drugs, biologics,
and medical devices, (2) chemicals, and (3) food and cosmetics. The Company
designs its software systems to help customers comply with FDA regulations,
including current Good Manufacturing Practice ("cGMP"), which involves
inventory, dispensing, production and packaging.
The Company also develops and markets other medical devices, including
uPACs(TM) and Prenval(TM). uPACS(TM) is an ultrasound picture archiving
communications systems that digitizes, records and stores images on CD-ROM
as an alternative to film and video storage. In 1997 we formed a limited
liability company ("LLC") with an individual investor who currently is a
principal stockholder of Base Ten. The Company contributed uPACs(TM)
technology to the LLC and the investor contributed $3 million to the LLC to
fund required further development of the technology. Base Ten has a 9%
interest in the LLC and the investor has a 91% interest in the LLC. The
PRENVAL(TM) software program analyzes results of blood tests for prenatal
detection of certain birth defects. The Company receives revenue from
PRENVAL(TM) from a license to Johnson & Johnson, who markets the product in
Europe under the name Prenata(TM).
C. Summary of Significant Accounting Policies
1. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
The consolidated interim financial statements should be read in
conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, as amended. The results of
operations for the three months and six months ended June 30,
1999 are not necessarily indicative of the operating results for
the full year. In management's opinion, all adjustments
necessary for a fair presentation of the financial statements
are reflected in the accompanying statements. In management's
opinion, all adjustments necessary for a fair presentation of
the financial statements are reflected in the accompanying
statements.
2. Principles of Consolidation - The consolidated financial
statements include the accounts of Base Ten Systems, Inc. and
its wholly-owned subsidiaries. All significant inter-company
accounts, transactions and profits have been eliminated.
3. Risks and Uncertainties - The Company operates in the software
industry, which is highly competitive and rapidly changing. The
Company has had a history of significant losses from operations
and is subject to certain risks, including all of the risks
inherent in a technology business, including but not limited to:
potential for significant technological changes in the industry
or customer requirements, potential for emergence of competitive
products with new capabilities or technologies, ability to
manage future growth, ability to attract and retain qualified
employees, dependence on key personnel, ability of software
developed by the Company and licensed to customers or developed
by third-party suppliers and used in the Company's operations to
properly support dates in the year 2000 and beyond, success of
its research and development, protection of intellectual
property rights, and potentially long sales and implementation
cycles. The Company is also subject to the risk associated with
not satisfying the NASDAQ NMS continued listing criteria.
The preparation of financial statements in accordance with
generally accepted accounting standards requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Significant
estimates include the allowance for doubtful accounts
receivable, the total costs to be incurred under software
license agreements requiring significant customizations or
modifications and the useful lives of capitalized computer
software costs. Actual costs and results could differ from these
estimates.
4. Net Loss Per Share - The Company calculates earnings per share
in accordance with the provisions of Statement of Financial
Accounting Standard No. 128, "Earnings Per Share" ("FAS 128").
FAS 128 requires the Company to present Basic Earnings Per Share
which excludes dilution and Diluted Earnings Per Share which
includes potential dilution. The following is a reconciliation
of the numerators and denominators used to calculate loss per
share in the Consolidated Statements of Operations (in
thousands, except share and per share data):
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Loss per common share-basic:
Net loss from continuing operations $ (3,946) $ (4,898) $ (11,405) $ (9,293)
Add: Gain from sale of discontinued operations 1,044 -- 1,044 --
Less: Dividend on Series A Preferred Stock -- (458) (262) (933)
Accretion on Series A Preferred Stock (282) -- (564) --
Credit on exchange of
Redeemable Convertible -- -- 445 --
Preferred Stock -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss to common shareholders (numerator) $ (3,184) $ (5,356) $ (10,742) $ (10,226)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares - basic (denominator) 22,157,000 9,132,800 20,839,000 8,732,700
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss per common share-basic $ (0.14) $ (0.59) $ (0.52) $ (1.17)
- ------------------------------------------------------------------------------------------------------------------------------------
Loss per common share-fully diluted:
Net loss $ (3,946) $ (4,898) $ (11,405) $ (9,293)
Add: Gain from sale of discontinued operations 1,044 -- 1,044 --
Less: Dividend on Series A Preferred Stock -- (458) (262) (933)
Accretion on Series A Preferred Stock (282) -- (564) --
Credit on exchange of
Redeemable Convertible -- -- 445 --
Preferred Stock -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss to common shareholders (numerator) $ (3,184) $ (5,356) $ (10,742) $ (10,226)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares 22,157,000 9,132,800 20,839,000 8,732,700
Effect of dilutive options / warrants -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares-fully diluted (denominator) 22,157,000 9,132,800 20,839,000 8,732,700
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss per common share-diluted $ (0.14) $ (0.59) $ (0.52) $ (1.17)
- ------------------------------------------------------------------------------------------------------------------------------------
Stock options, warrants and rights would have an anti-dilutive
effect on earnings per share for the periods ended June 30, 1999
and 1998 and, therefore, were not included in the calculation of
fully diluted earnings per share.
5. Investments - The Company accounts for its investments using
Statement of Financial Accounting Standard No. 115, "Accounting
for Certain Investments in Debt and Equity Securities"("FAS
115"). This standard requires that certain debt and equity
securities be adjusted to market value at the end of each
accounting period. Unrealized market value gains and losses are
charged to earnings if the securities are traded for short-term
profit. Otherwise, such unrealized gains and losses are charged
or credited to a separate component of shareholders' equity.
Management determines the proper classifications of investments
in obligations with fixed maturities and marketable equity
securities at the time of purchase and reevaluates such
designations as of each balance sheet date. At June 30, 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 June 30, 1999 and December 31,
1998, consisted of common stock with a cost basis of $50,000 and
are included in other current assets. Differences between cost
and market of $42,000 and $54,000 were included as a component
of "accumulated other comprehensive income (loss)" in
shareholders' equity, as of June 30, 1999 and December 31, 1998,
respectively.
6. Reclassifications - Certain reclassifications have been made to
prior year financial statements to conform to the current year
presentation.
D. Acquisitions
Almedica Technology Group Acquisition
On June 11, 1999, the Company acquired all of the outstanding stock of
Almedica Technology Group Inc. ("Almedica"), a wholly-owned subsidiary
of Almedica International Inc. in exchange for 3.95 million shares of
Class A Common Stock. At the time of the purchase, Class A Stock traded
for $.90625 per share. 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. Management estimates the value of certain amortizable assets to be
$3.4 million. These assets are included in other assets and are being
amortized on a straight line basis over a period of seven years.
Simultaneous with the closing of the transaction, the subsidiary was
renamed BTS Clinical, Inc.
Termination of discussions to acquire Select Software Tools
On March 16, 1999, the Company's Board of Directors approved the
commencement of discussions to acquire Select Software Tools, plc
(NASDAQ: SLCTY) ("Select") in a stock transaction. In conjunction with
these discussions, the Company loaned approximately $1,150,000 to Select
pursuant to a promissory note. Discussions with Select terminated in May
1999 and Select repaid the Company's loan in full, including interest,
in June 1999.
E. Redeemable Convertible Preferred Stock and Convertible Debt
On December 4, 1997, the Company entered into a securities purchase
agreement to sell 19,000 of Series A 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. An additional 346,000 warrants were issued to consultants
valued at approximately $1,011,000. The transaction resulted in net
proceeds of $6,984,000, net of offering costs of $1,380,000. The Company
allocated the net proceeds of the first tranche of Series A Preferred
Stock and the warrants based upon their relative fair values resulting
in $6,155,000 assigned to the Series A Preferred Stock and $829,000 to
the warrants. On December 31, 1997, 9,625 shares of Series A Preferred
Stock and 385,000 warrants were issued to the holders of the Series A
Preferred Stock, net of cash offering costs of approximately $245,000,
resulting in net proceeds of $9,380,000. The Company allocated the net
proceeds of the second tranche of Series A Preferred Stock and the
warrants based upon their relative fair values resulting in $8,529,000
assigned to the Series A Preferred Stock and $851,000 to the warrants.
Such proceeds were received on January 2, 1998, and were recorded as
subscriptions receivable at December 31, 1997.
During 1998, 5,798 shares of Series A Preferred Stock were converted
into 1,917,806 shares of Class A Common Stock and 1,740 shares of Series
A Preferred Stock were issued as dividends resulting in 14,942 shares of
Series A Preferred Stock outstanding at December 31, 1998.
On March 5, 1999, the outstanding Series A Preferred Stock and warrants
were exchanged for Series B 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 were issued
to Series B Preferred Stockholders, and 720,000 Warrants were issued to
replace certain original Warrants issued in December 1997. The Series B
Preferred Stock and Warrants have been recorded at their estimated fair
value of $13,013,000. The difference between this estimated fair value
and the carrying value of the Series A Preferred Stock has been recorded
as a credit to net loss available to common shareholders.
Also on March 5, 1999, the Company's $10 million Convertible
Subordinated Debenture was converted at the reduced conversion price of
$4.00 per share. The shareholders had previously approved a proposal to
authorize the Company to decrease this conversion price from $12.50 to
$4.00 per share of Class A Common Stock. The market value of the
additional conversion shares issued as a result of the reduced
conversion price was approximately $3,506,000.
The terms of the Series B Preferred Stock are similar to the Series A
Preferred Stock, except that: (a) the Series B Preferred Stock have a
conversion price of that number of shares determined by dividing the
Mandatory Redemption Price, as defined in the terms of the Series B
Preferred Stock, by $4.00, whereas the conversion price of the Series A
Preferred Stock was equal to the Mandatory Redemption Price divided by
the lesser of (i) $16.25 or (ii) the Weighted Volume Average Price (as
defined) of the Class A Common Stock prior to the conversion date
limited to 3,040,000 shares; (b) the Series B Preferred Stock does not
provide the holder with the option to receive a subordinated 8%
promissory note because of the elimination of the 3,040,000 share
limitation; and (c) the Series B Preferred Stock does not provide for a
dividend payment based on the market price of the Class A Common Stock.
As a result of the exchange of Series A Preferred Stock for Series B
Preferred Stock, preferred stock dividends are no longer required to be
paid by the Company.
The Series B Preferred Stock is convertible at any time or from time to
time into Class A Common Stock at a conversion price of $4.00.
The Series B Preferred Stock matures on December 15, 2000. On the
maturity date, the Company must redeem the outstanding preferred stock
at its Mandatory Redemption Price, which is the sum of 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. Accordingly, the Company is 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 three year period from issuance to maturity. The
accretion in the second quarter of 1999 aggregated approximately
$282,000. If the Company elects to settle the redemption in Class A
Common Stock the Mandatory Redemption Price is 1.25 times the purchase
price and would result in an additional charge in the period of
redemption.
Holders of the Series B Preferred Stock have the right to require the
Company to purchase their shares for cash upon the occurrence of a
Redemption Event. Redemption Events include: a) suspension of trading or
delisting from specified stock exchanges of the Class A Common Stock 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 is the greater of a) 1.25 times the Mandatory
Redemption Price, or b) the Mandatory Redemption Price divided by the
product of the effective conversion price and the market value of the
common shares. Any remaining accretion to the actual cash purchase price
would be recorded upon a Redemption Event.
The Series B Preferred Stock is mandatorily redeemable upon the
occurrence of a Redemption Event at the election of the holder and,
accordingly, is classified as Redeemable Convertible Preferred Stock,
rather than as a component of Shareholders' Equity (Deficit).
The Series B Preferred Stock has a liquidation preference as to its
principal amount and any accrued and unpaid dividends. The Company has
reserved 7,068,465 shares of Class A Common Stock for conversion of
Series B Preferred Stock and exercise of certain common stock warrants
held by the Series B Preferred Stockholders.
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 of Class A Common
Stock exercisable at $3.00 per share. The issuance of one-half of the
warrants was effected by modifying certain provisions of existing
warrants held by the Series B Preferred Stockholders. The Company may
force the exercise of the warrants if, among other things, the Class A
Common Stock trades at $4.00 or more for 20 consecutive trading days and
the aggregate of cash (and cash equivalents) as shown on the Company's
most recent balance sheet is $5,000,000 or more. If there is a forced
exercise, the exercise price of certain other existing warrants held by
the Series B Preferred Stockholders would be modified to the lesser of
(i) market value and (ii) the exercise price then in effect. See Note H
to the Consolidated Financial Statements.
F. Segment Information
The Company is organized and operates as a single segment. The following
tabulation details the Company's operations in different geographic areas
for the six months ended June, 1999 and 1998 (dollars in thousands):
United States Europe Eliminations Consolidated
- ----------------------------------------- ------------------- ---------------------- --------------------- ----------------------
Six Months Ended June 30, 1999:
Revenues from unaffiliated sources $1,445 $ 1,240 $ -- $ 2,685
Identifiable assets at June 30, 1999 $36,601 $ 1,212 $ (8,000) $ 29,813
=================== ====================== ===================== ======================
Six Months Ended June 30, 1998:
Revenues from unaffiliated sources $1,051 $ 1,911 $ -- $ 2,962
Identifiable assets at June 30, 1998 $28,200 $ 1,005 $ (5,494) $ 23,711
G. Discontinued Operations
On October 27, 1997 the Company entered into an agreement to sell its
Government Technology Division ("GTD") to Strategic Technology Systems,
Inc. ("Strategic"). The net assets of the GTD were sold to Strategic at
the close of business on December 31, 1997.
The agreement between the Company and Strategic, in general, required
that the selling price of the net assets, on the closing date of
December 31, 1997, be equal to the lower of the aggregate net asset
value as of October 31, 1997 or December 31, 1997. The net asset value
at October 31, 1997 and December 31, 1997 was $5,338,000 and $5,075,000,
respectively. As a result, the final net asset value was recorded at
$5,075,000 between the Company and Strategic.
In consideration for the value of the net assets sold, the Company
received $3,500,000 in cash, and an unsecured promissory note for
$1,975,000. This amount represents the difference between (i) the final
amount of the net assets of GTD as of the closing date plus $400,000,
and (ii) $3,500,000. The note has a five-year term bearing interest at a
rate of 7.5% per annum, payable quarterly. Principal payments under the
note will amortize over a three-year period beginning on the second
anniversary of the closing. The note also provides for accelerated
payment of principal and interest upon the occurrence of certain events.
The Company also received a warrant from Strategic exercisable for that
number of shares of the voting common stock of Strategic which equals 5%
of the issued and outstanding shares of common stock and common stock
equivalents immediately following and giving effect to any initial
underwritten public offering by Strategic. Upon the sale of Strategic
prior to any such initial underwritten public offering, the Company
would receive 15% of the gross proceeds of such transaction that are in
excess of $7 million, and the warrant described above would be
cancelled.
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 May, 1999 in the form of a
cash payment of approximately $1.0 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 subleased to Strategic approximately 30,000 square feet of
space plus allowed the use of 10,000 square feet of common areas for a
period of five years at an annual rental of $240,000 for each of the
first three years and $264,000 for each of the last two years of the
sublease.
H. Subsequent Events
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. At a hearing before the NASD in July 1999 the
Company appealed the NASD's determination. The Company presented
information to support its view that the Company was in compliance and
presented a plan for continued compliance with the NASDAQ NMS continued
listing criteria. The NASD has not yet informed the Company of its
determination following the hearing.
In July 1999, the Company began delivering version 3.2 of BASE10TMME.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This section should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Annual Report on Form 10-K for the period ended December 31, 1998, as
amended.
Three Months ended June 30, 1999 compared with Three Months ended June 30, 1998
Continuing Operations
Revenues. Revenues decreased 50% to $1.0 million in the three-month
period ended June 30, 1999 as compared to $2.1 million in the period ended
June 30, 1998. The revenue decrease is primarily related to the Company's
delaying delivery of orders to customers until the release in July 1999 of
version 3.2 of BASE10TMME. Revenues for the 1999 period were derived 15% from
software licenses and enhancements, 25% from maintenance and 60% from support
services, compared to revenues for the 1998 period which were derived 29%
from software licenses and enhancements, 18% from maintenance and 53% from
support services.
Cost of Sales. Cost of sales, which includes amortization of software
development costs for PHARMASYST(TM) and BASE10(TM)ME, decreased 65% to $1.3
million in the 1999 period from $3.6 million in the 1998 period. The decrease
is primarily the result of a reduction of $1.0 million in labor and related
expenses, a reduction of $.4 million in outsourced labor and a $.5 million
reduction of amortization of software development costs.
Research and Development Costs. Research and development costs increased
to $0.4 million in the 1999 period as compared to $0.2 million in the 1998
period. The increase is related to additional salaries and related expenses
in the 1999 period being dedicated to developing future versions of the
Company's products.
Sales and Marketing Expenses. Sales and marketing expenses increased in
the 1999 period to $1.5 million from $1.0 million in the 1998 period. This
rise was mainly due to the hiring of additional personnel which caused an
increase in salaries and related expenses.
General and Administrative Expenses. General and administrative expenses
totaled $1.9 million in both the 1999 period and the 1998 period. Labor and
related expenses decreased in the 1999 period by $0.2 million as compared to
the 1998 period. This change was offset by increased realized expenses of
$0.2 million related to the uPACS(TM) operation, which the Company began
funding in January 1999.
Other Income and Expense. Other income and expense improved by $0.3
million to a net income of $0.1 million in the 1999 period from a net expense
of $0.2 million in the 1998 period. Other income and expense in 1999 is
primarily comprised of interest income of $0.2 earned on investments and a
note receivable from Strategic Technology Systems, Inc. ("Strategic") offset
by interest expense of $0.1 million. In the 1998 period, other expense was
comprised of interest expense of $0.4 million, offset by $0.2 million of
interest and other income. Interest expense decreased in the 1999 period as a
result of the conversion of the Company's long-term debt in March 1999.
Continuing Losses. The Company incurred a net loss of $4.0 million in
the quarter ended June 30, 1999, compared to a $4.9 million net loss for the
quarter ended June 30, 1998. The loss in the 1999 period was less than the
comparable period in 1998 despite a reduction in revenue of $1.0 million.
Operating expenses decreased $1.6 million to $5.2 million in 1999 from $6.7
million in the 1998 period due to decreases in amortization of software
development costs of ($0.5 million), outsourced labor ($0.4 million) and
salaries and related expenses ($0.5 million). The Company expects additional
losses during the remainder of 1999. The Company's ability to achieve
profitable operations is dependent upon, among other things, ongoing
successful development of its BASE10(TM)ME, BASE10(TM)CS, BASE10(TM)FS,
BASE10(TM)ADLS and BASE10(TM)ADMS systems, timely delivery and successful
installation and acceptance of its systems by its customers, and successful
competition in the markets in which the Company participates.*
Additional Proceeds from Discontinued Operations
During the second quarter of 1999, the Company received a cash payment
of $1.0 million as a result of the sale of Strategic to Smiths Industries
("Smiths"). This payment was received in accordance with the terms of the
Company's agreement to sell certain assets of its Government Technology
Division ("GTD") to Strategic in 1997. The Company does not anticipate any
further income or expenses relating to the disposition of the GTD.*
Six Months ended June 30, 1999 compared with Six Months ended July 31, 1998.
Continuing Operations
Revenues. Revenues were $2.7 million in the six-month period ended June
30, 1999 as compared to $3.0 million in the comparable period ended July 31,
1998. The revenue decrease is primarily related to the Company's delaying
delivery of orders to customers until the release in July 1999 of version 3.2
of BASE10TMME. Revenues for the six months ended June 30, 1999 were derived
29% from software licenses and product enhancements, 50% from solutions
services and 21% from maintenance, compared to 33% from software licenses and
product enhancements, 54% from solutions services and 13% from maintenance in
the six-month period ended July 31, 1998.
Cost of Sales. Cost of sales during the period ended June 30, 1999
decreased 54% to $2.8 million from $6.1 million in the six months ended July
31, 1998. In the 1999 period, salary and related expenses in cost of sales
were approximately $1.8 million, as compared to $3.5 million in 1998,
representing a decrease of $1.7 million. In addition, outsourced labor
decreased by $0.8 million and amortization of software development costs
decrease by $0.9 million during the 1999 period.
Research and Development Costs. Research and development costs increased
to $0.9 million in the 1999 period as compared to $0.3 million in the 1998
period. This increase is related to additional salaries and related expenses
in the 1999 period. Research and development costs are incurred to develop
future additions to the Company's current product family.
Sales and Marketing Expenses. Sales and marketing expenses increased 36%
in the 1999 period to $3.0 million, from $2.2 million in the six months ended
July 31, 1998. The rise was mainly attributable to the hiring of additional
personnel which increased salary and related expenses.
General and Administrative Expenses. General and administrative expenses
increased in the 1999 period to $4.0 million, from $3.2 million in the
comparable 1998 period. The increase was primarily due to an additional $0.4
million for professional fees as well as $0.5 million in expenses relating to
the uPACSTM operation, which the Company began funding in January 1999.
Other Income and Expenses. Other income and expense improved to a net
income of $0.1 million in the 1999 period from a net expense of $.4 million
in the first six months of 1998. Other income and expense in 1999 is
primarily comprised of interest income and interest expense. Interest income,
derived from a note receivable from Strategic and investments in cash and
cash equivalents totaled $0.4 million in the 1999 period and $0.3 million in
the 1998 period. Interest expense decreased from $0.9 million in the 1998
period to $0.4 in the 1999 period as a result of the conversion of the
Company's long-term debt in March 1999.
Continuing Losses. The Company incurred a net loss from continuing
operations of $11.4 million in the six months ended June 30, 1999, compared
to a $9.3 million net loss for the six month period ended June 30, 1998. Of
the loss in the 1999 period, $3.5 million was caused by the one-time non-cash
accounting charge related to the March 1999 conversion of the $10 million
debenture. Excluding the effects of this one-time charge, the net loss for
the six months ended June 30 was $1.3 million less in 1999 than in 1998.
Revenue was $0.3 million lower in the 1999 period than in the 1998 period.
Cost of revenues decreased by $3.2 million, but this was partially offset by
increases in research and development ($0.6 million), selling and marketing
($0.7 million), and general and administrative expenses ($1.0 million). Other
income and expenses improved in the 1999 period by $0.5 million. The
Company's ability to achieve profitable operations is dependent upon, among
other things, the completion of current development and testing activities
for BASE10(TM)ME, BASE10(TM)CS, BASE10(TM)FS, BASE10(TM)ADLS, and
BASE10(TM)ADMS systems, timely delivery and successful installation and
validation of its systems by its customers, and successful competition in the
markets in which the Company participates.*
Additional Proceeds from Discontinued Operations
During the second quarter of 1999, the Company received a cash payment
of $1.0 million as a result of the sale of Strategic to Smiths Industries
("Smiths"). This payment was received in accordance with the terms of the
Company's agreement to sell certain assets of its Government Technology
Division ("GTD") to Strategic in 1997. The Company does not anticipate any
further income or expenses relating to the disposition of the GTD.*
Other Events in 1999
The Company is relying on its leading products, BASE10(TM)ME,
BASE10(TM)CS, BASE10(TM)FS, BASE10(TM)ADLS and BASE10(TM)ADMS, to stimulate new
orders. The Company began shipping version 3.2 of BASE10(TM)ME in July 1999.
Neither the additional development of the Company's MES products nor the
consequential generation of cash can be assured, either in time or amount, nor
is there any assurance that such amounts will be sufficient for the Company's
needs. In the absence of such orders or the promise thereof, neither of which
can be assured, as well as in connection with its expected capital needs for the
year 2000 and beyond, the Company may elect to seek additional sources of
capital and may also elect to reduce the pace of its development of its products
and/or establish other cost reduction measures, which could adversely impact the
Company. In the event the Company elects to seek additional capital there can be
no assurance that such funds or capital would be available on the terms or in
the amounts needed. *
On June 11, 1999, the Company acquired all of the outstanding stock of
Almedica Technology Group, Inc. ("Almedica"), a wholly owned subsidiary of
Almedica International, Inc. in exchange for 3.95 million shares of Class A
Stock. At the time of the purchase, Class A Common Stock traded for $.90625 per
share. The acquisition has been accounted for under the purchase method.
Simultaneous with the closing of the transaction, the subsidiary was renamed BTS
Clinical, Inc. In conjunction with the transaction, Clark Bullock, Almedica
International, Inc.'s Chairman of the Board, became a director of the Company.
In addition, Mr. Robert J. Bronstein, formerly President of Almedica, joined the
Company as President, Applications Software Division and Chief Operating
Officer. As a result of this acquisition the Company now markets BASE10(TM)ADLS
and BASE10(TM)ADMS, which are the clinical supplies management systems.
On March 17, 1999, Drew Sycoff, a principal of Andrew Garrett, Inc.,
suggested to Thomas E. Gardner, the Chief Executive Officer of the Company, on
behalf of Mr. Sycoff's clients, including Jesse L. Upchurch, the beneficial
owner of more than 40% of the combined voting power of the Company, that Mr.
Gardner should consider resigning and that if he were to resign, that Mr. Sycoff
would be able to negotiate a transition. In a subsequent conversation on the
same day, Mr. Gardner offered Mr. Sycoff an opportunity to present his
viewpoints to the board of directors of the Company and offered to call a
special meeting of the Board if Mr. Sycoff wanted an early meeting. Mr. Sycoff
indicated that the matter was not urgent and such presentation, if one were to
be made, could wait at least until after the annual meeting of shareholders
which was then anticipated to be held in May 1999. On April 1, 1999, at a
meeting of the Board, the Board gave to Mr. Gardner its unqualified continuing
support. However, on April 2, 1999, Mr. Sycoff, on behalf of his clients,
demanded Mr. Gardner's resignation, and the resignations of the entire Board.
Mr. Sycoff also indicated that unless the Board of Directors resigned before the
annual meeting of shareholders, he would, on behalf of the shareholders whom he
represented, commence a proxy contest with respect to the annual election of
directors.
On April 15, 1999 Mr. Sycoff rescinded his request for the resignations of
Mr. Gardner and the Board of Directors. The Board then nominated John C.
Rhineberger and Robert Hurwitz, Mr. Sycoff's group's two nominees to the
Company's Board of Directors. Mr. Rhineberger and Mr. Hurwitz were elected to
the Board of Directors at the Company's annual meeting of shareholders in May
1999.
Readiness for the Year 2000
Generally, in today's business environment, some computers, software, and
other equipment include programming code in which calendar year data is
abbreviated to only two digits. As a result of this design decision, some of
these systems could fail to operate or fail to produce correct results if "00"
is interpreted to mean 1900, rather than 2000. The Company, in anticipating the
year 2000, has kept the potential for this problem (the "Y2K Problem") in mind
when purchasing new computers, software and equipment during the past year. The
Company has also considered the Y2K Problem when developing new products for
sale to customers.
Company Readiness. The Y2K Problem could affect computers, software, and
other equipment used, operated, or maintained by the Company. Accordingly,
during the second quarter of 1998, the Company formed an internal Y2K committee
whose goal is to minimize any disruptions of the Company's business and to limit
the Company's liabilities resulting from the Y2K Problem. As a result, the
Company has reviewed its internal computer programs and systems, as well as the
software that the Company develops and sells to customers, to determine if the
programs and systems will be Y2K compliant.
Information Technology Systems. During the first quarter of 1998, the
Company, in anticipation of the year 2000, replaced its existing financial
accounting software system, which the Company deems to be a business-critical
system, with a system which is vendor-certified as being Y2K compliant.
The Company has reviewed all of the major computers, software
applications, and related equipment used in connection with its internal
operations to ensure that the possibility of a material disruption to its
business is minimized. The Company has identified one remaining computer system
which is not currently Y2K-compliant but will be replaced prior to the year
2000.
Systems Other than Information Technology Systems. In addition to
computers and related systems, the operation of office and facilities equipment,
such as fax machines, photocopiers, telephone switches, security systems, and
other common devices may be affected by the Y2K Problem. The Company has
assessed the potential effect of, and costs of remediating, the Y2K Problem on
its office and facilities equipment. The risk of business interruption due to
this equipment is minimal.
Software Sold to Customers. The Company believes that it has substantially
identified and resolved all potential Y2K Problems with its MES software, as
well as with version 3.4 and later versions of BASE10(TM)FS. However, management
also believes that it is not possible to determine with complete certainty that
all Y2K Problems affecting the Company's software products have been identified
or corrected due to 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(TM) which have not been tested
by the Company for Y2K compliance. All of the customers that have purchased
these earlier versions have had substantial customization done, which dictates
that Y2K testing and modifications must be done on a case by case basis. These
customers have been notified of the Company's willingness and ability to provide
Y2K test specifications and/or assistance for a fee. It is a small number of
customers that still operate with these earlier versions, and the Company
believes that Y2K issues, if any, related to these earlier versions of the
Company's software product will not require any material financial or human
resources.
Some customers have earlier versions of BASE10(TM)FS (prior to version
3.4) which have not been tested for Y2K compliance. However, the Company has a
standard upgrade path in place for bringing any of these earlier versions into
Y2K compliance if the customer wishes to do so.
Costs of Compliance. The Company currently believes that the one remaining
computer system that is currently not Y2K compliant will be replaced prior to
the end of 1999, and estimates the total costs to the Company of completing the
required replacements of these internal systems will not have a material adverse
effect on the Company's business or results of operations, although no
assurances can be given. Costs to be incurred are expected to be immaterial and
are currently estimated at less than $100,000.
Third Party Suppliers. The Company has communicated with third-party
suppliers of the major computers, software, and other equipment used, operated,
or maintained by the Company to identify and, to the extent possible, to resolve
issues involving the Y2K Problem. The majority of the Company's significant
suppliers are software industry leaders that have provided upgrades to resolve
any Y2K Problems or will provide them prior to the end of 1999. The Company
believes that it has resolved all significant Y2K Problems with these systems or
will do so prior to the end of 1999. However, due to the complexity of these
systems, there can be no assurance that these suppliers resolved or will resolve
all Y2K Problems or that no material disruptions to the Company's systems will
occur. Any failure of these third-parties to resolve Y2K Problems with the
Company's systems in a timely manner could, but is not currently expected to,
have a material adverse effect on the Company's business, financial condition,
and results of operations.
Most Likely Consequences of Year 2000 Problems. The Company believes it
has identified and is in the process of resolving all Y2K Problems that could
have a material adverse effect on its business operations. However, management
believes that it is not possible to determine with complete certainty that all
Y2K Problems affecting the Company will be identified or corrected. It is not
possible to accurately predict how many Y2K Problem-related failures will occur
or the severity, duration, or financial consequences of any such failures. As a
result, management expects that the Company, under a worst-case scenario, could
suffer the following consequences: (a) a significant number of operational
inconveniences and inefficiencies for the Company and its clients that may
divert management's time and attention and financial and human resources from
its ordinary business activities; and (b) a small number of serious system
failures related to older versions of the Company's PHARMASYST(TM) and
PHARM2(TM) products that may require significant efforts by the Company and/or
its customers to prevent or alleviate material business disruptions.
Contingency Plans. The Company is currently implementing contingency plans
to developed as part of its effort to identify and correct Y2K Problems that may
affect its internal systems, software and third party suppliers. The Company
expects to complete implementation of its contingency plans prior to end of
1999. These plans include accelerated replacement of affected third party
equipment and software prior to the end of 1999. Based on the Company's current
analysis of the Y2K Problem, as described above, the Company does not believe
that the Y2K Problem will have a material adverse effect on the Company's
business or results of operations.
Disclaimer. The discussion of the Company's efforts, and management's
expectations, relating to Y2K compliance are forward-looking statements. The
Company's ability to achieve Y2K compliance and the level of incremental costs
associated therewith, could be adversely impacted by, among other things, the
resources needed to bring older versions of the Company's PHARMASYST(TM) and
PHARM2(TM) software into Y2K compliance, the third-party supplier's ability to
modify its proprietary software, and unanticipated problems identified in the
ongoing compliance review.
Liquidity and Capital Resources
The Company's working capital decreased from $15.5 million to $9.1 million
during the six months ended June 30, 1999. The Company had $10.3 million of cash
at June 30, 1999 whereas the Company had $17.4 million of cash at December 31,
1998. The decrease in cash during the six months ended June 30, 1999 resulted
primarily from cash used in operations of $7.9 million.
In 1999 cash used in operations has been affected primarily by the net
loss of $11.6 million (largely offset by the $3.5 million non-cash accounting
charge related to the $10 million debenture conversion), an increase of $0.6
million in accounts receivable, and a reduction of $1.0 million in accounts
payable and accrued expenses. These uses of cash have been partially offset by
amortization and depreciation of $1.4 million, included in the aforementioned
net loss amount, an increase in deferred revenue of $0.7 million and by a
one-time receipt of $1.0 million related to the GTD sale.
The Company's financial statements have been prepared on the basis that it
will continue as a going concern. The Company has incurred significant operating
losses and negative cash flows in recent years. Also, at December 31, 1998 the
Company was below the $4 million minimum net tangible assets, as defined,
required for its current listing on the NASDAQ National Market System. In March
1999, the Company's shareholders' equity was increased by approximately $9.6
million through the conversion of its $10 million convertible debenture into
common stock. As a result of this conversion, the Company's net tangible assets
rose above the $4.0 million minimum to $7.4 million at March 31, 1999.
Coincident with that debt conversion, the Company's Series A Redeemable
Convertible Preferred Stock was exchanged for Series B Redeemable Convertible
Preferred Stock. These Preferred Stocks have certain Redemption Events, which if
such events occurred, would provide the holder with the right to require the
Company to purchase their shares for cash which would adversely affect the
Company. See Note E to the Consolidated Financial Statements. Accordingly, where
these rights exist such redeemable securities are categorized outside of
shareholders' equity and, thus, may not qualify as equity for the purposes of
the NASDAQ minimum net tangible asset requirement. Also, these Preferred Stock
holders may have other rights/claims in connection with the March 1999
transactions described above.
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. At a hearing before
the NASD in July 1999 the Company appealed the NASD's determination. The Company
presented information to support its view that the Company was in compliance and
presented a plan for continued compliance with the NASDAQ NMS continued listing
criteria. The NASD has not yet informed the Company of its determination
following the hearing.
To further increase the Company's net tangible assets and in order to help
further ensure the Company's compliance with NASDAQ listing requirements,
management is in the process of negotiating with all participants in the March
1999 Preferred Stock exchange to obtain waivers of any redemption or recission
rights. These waivers, if obtained, would eliminate cash redemption rights where
the redemption event is beyond the control of the Company. This would qualify
all related securities for classification in permanent stockholders' equity and
increase the Company's qualifying net tangible assets. If such waivers are
obtained, then management believes that the Company's current liquidity would be
sufficient to meet its cash needs for its existing business through fiscal 1999.
However, there can be no assurance that management's efforts in this regard will
be successful.
If management is not successful in obtaining such waivers, and it
continues to incur operating losses it could fall below the minimum net asset
requirement needed to qualify for continued listing on NASDAQ NMS. Management's
plans in this regard include, among other things, (i) attempting to improve
operating cash flow through increased license sales and service revenue, and
(ii) increasing the level of anticipated streamlining of its selling,
administration and development functions. However there is no assurance that
such plans, if implemented, will be sufficient.
If current cash and working capital, reduced by cash used in operations in
1999, are not sufficient to satisfy the Company's liquidity and minimum net
tangible asset requirements, the Company will seek to obtain additional equity
financing. Additional funding may not be available when needed or on terms
acceptable to the Company. If the Company were required to raise additional
financing for the matters described above and/or to continue to fund expansion,
develop and enhance products and services, or otherwise respond to competitive
pressures, there is no assurance that adequate funds will be available or that
they will be available on terms acceptable to the Company. Such a limitation
could have a material adverse effect on the Company's business; financial
condition or operations and the financial statements do not include any
adjustment that could result therefrom.
On March 5, 1999, the holder of the $10 million 9.01% convertible
debenture converted the debenture into 2,500,000 shares of Class A Common Stock
which increased shareholders' equity by approximately $9.6 million including a
first quarter 1999 non-cash charge of approximately $3.5 million.
On November 10, 1998, the shareholders approved the sale and issuance of
Series B Preferred Stock in exchange for Series A Preferred Stock (subject to
the execution of definitive agreements) and the issuance of Class A Common Stock
purchase warrants to the Series B Preferred Stockholders. On March 5, 1999, the
outstanding shares of Series A Preferred Stock were exchanged for Series B
Preferred Stock. This exchange resulted in a non-cash credit to net loss
available to Class A Common Stockholders of $445,000 in the first quarter of
1999. For further discussion of the Series A and B Preferred Stock see Note E to
the Consolidated Financial Statements.
For each $1 million of the Series A Preferred Stock held by the 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 of Class A Common Stock exercisable
at $3.00 per share. The issuance of one-half of the warrants was effected by
modifying certain provisions of existing warrants held by the Series B Preferred
Stockholders. The Company may force the exercise of the warrants if, among other
things, the Class A Common Stock trades at $4.00 or more for 20 consecutive
trading days and the aggregate of cash (and cash equivalents) as shown on the
Company's most recent balance sheet is $5,000,000 or more. If there is a forced
exercise, the exercise price of certain other existing warrants held by the
Series B Preferred Stockholders would be modified to the lesser of (i) market
value and (ii) the exercise price then in effect.
During the fourth quarter of 1998, the Company initiated a search for a
potential buyer of uPACS LLC (the "LLC") and its technology. At December 31,
1998, the LLC had substantially exhausted its capital resources and, as of the
filing date of this quarterly report on Form 10-Q, a buyer had not yet been
located. The Company continues to fund the enhancement of the LLC's product and
seeks to identify a potential beta site for its technology .
On March 16, 1999, the Company's Board of Directors approved the
commencement of discussions to acquire Select in a stock transaction. In
conjunction with these discussions, the Company loaned a total of $1,150,000 to
Select under a promissory note. Discussions with Select terminated in May, 1999
and Select repaid the loan in full, including interest, in June 1999.
The Company continually monitors its costs and undertook certain steps
during the first half of 1999 to restructure its selling, administrative and
development functions with the intention of further streamlining operations and
reducing operating expenses. The full effect of these changes will not be
realized until the second half of 1999.
*Forward Looking Statement
The foregoing contains forward looking information within the meaning of
The Private Securities Litigation Reform Act of 1995. Such forward looking
statements and paragraphs may be identified by an "asterisk" ("*") or by such
forward looking terminology as "may", "will", "believe", "anticipate", or
similar words or variations thereof. Such forward looking statements involve
certain risks and uncertainties including the particular factors described more
fully above in the MD&A section and throughout this report and in each case
actual results may differ materially from such forward looking statements.
Successful marketing of BASE10(TM)ME and BASE10(TM)FS and their future
contribution to Company revenues depends heavily on, among other things,
successful early completion of current test efforts and the necessary
corrections to the software permitting timely delivery to customers, none of
which can be assured. Other important factors that the Company believes may
cause actual results to differ materially from such forward looking statements
are discussed in the "Risk Factors" sections in the Company's Registration
Statement on Form S-3 (File No. 333-70535) as well as current and previous
filings with the Securities and Exchange Commission. In assessing forward
looking statements contained herein, readers are urged to read carefully those
statements and other filings with the Securities and Exchange Commission. The
Company does not undertake to publicly update or revise its forward looking
statements even if experience or future changes make it clear that any projected
results or events (expressed or implied) will not be realized.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Part II. Other Information
Item 4: Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on May 18, 1999.
At the Annual Meeting, John C. Rhineberger and Robert Hurwitz were elected
as directors, each for a three-year term. The results of the Shareholder vote
was follows
Proposal Class Votes For Votes Withheld Abstentions
-------- ----- --------- -------------- -----------
Election of Class A Common Stock 14,160,012 139,902 --
John C. Rhineberger Class B Common Stock 23,193 374 --
Series B Preferred Stock
(as if converted to Class
A Common Stock) -- -- --
Election of Class A Common Stock 14,160,012 139,902 --
Robert Hurwitz Class B Common Stock 23,193 374 --
Series B Preferred Stock
(as if converted to Class
A Common Stock) -- -- --
Directors whose terms of office continued following the Annual Meeting
were Thomas E. Gardner, David C. Batten, Alexander M. Adelson and Alan S. Poole.
A vote of shareholders was taken at the Annual Meeting on a proposal to amend
the 1998 Stock Option and Stock Award Plan. The proposal was not approved by the
shareholders. The results of the shareholder vote was as follows:
Proposal Class Votes For Votes Against Abstentions
-------- ----- --------- ------------- -----------
Amendment to the 1998 Class A Common Stock 946,714 13,333,435 20,133
Stock Option and Stock Class B Common Stock 4,230 19,337 --
Award Plan Series B Preferred Stock
(as if converted to Class
A Common Stock) -- -- --
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits - (27) Financial Data Schedule (Edgar filing only).
10(lll) Change in Control Agreement dated June 11, 1999
by and between Base Ten Systems, Inc. and
Robert J. Bronstein (modifying Exhibit 10(kkk)
filed with Base Ten Systems, Inc.'s Current
Report on Form 8-K on June 16, 1999).
10(mmm) Consulting Agreement dated June 25, 1999 by and
among Base Ten Systems, Inc., Eurisko and Kris
Adriaenssens.
(b) Reports on Form 8-K - Current Report on Form 8-K dated June 11, 1999
filed on June 16, 1999 reporting Base Ten Systems, Inc.'s acquisition
of Almedica Technology Group.
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: August 13, 1999
Base Ten Systems, Inc.
(Registrant)
By: /s/ Thomas E. Gardner
---------------------------------------------
Thomas E. Gardner
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ William F. Hackett
---------------------------------------------
William F. Hackett
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
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: August 13, 1999
Base Ten Systems, Inc.
(Registrant)
By:-----------------------------------------
Thomas E. Gardner
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
By:
--------------------------------------------
William F. Hackett
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)