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 September 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
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 November 10, 1999
-------------- --------------------------------
Class A Common Stock, $5.00 par value 5,052,096
Class B Common Stock, $5.00 par value 14,227
Base Ten Systems, Inc.
And Subsidiaries
Index
Part I. Financial Information Page
Item 1: Financial Statements
Consolidated Balance Sheets - September 30, 1999 (unaudited)
and December 31, 1998 (audited)................................................ 1
Consolidated Statements of Operations -- Three and nine months
ended September 30, 1999 and 1998 (unaudited).................................. 2
Consolidated Statements of Changes in Shareholders' Equity - Nine
months ended September 30, 1999 (unaudited).................................... 3
Consolidated Statements of Cash Flows -- Nine months ended
September 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............................... 11
Item 3: Quantitative and Qualitative Disclosures About Market Risk ....... 16
Part II. Other Information
Item 6: Exhibits and Reports on Form 8-K.................................. 17
ITEM 1. FINANCIAL STATEMENTS
Base Ten Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share and per share data)
September 30 December 31
1999 1998
(unaudited) (audited)
---------------------------------
Assets
Current Assets:
Cash and cash equivalents............................................... $ 8,539 $ 17,437
Accounts receivable, net................................................ 2,285 2,372
Other current assets.................................................... 513 639
---------------------------------
Total Current Assets................................................. 11,337 20,448
Property, plant and equipment, net......................................... 4,753 5,026
Note receivable............................................................ 1,975 1,975
Other assets............................................................... 7,854 6,372
=================================
Total Assets......................................................... $ 25,919 $ 33,821
=================================
Liabilities, Redeemable Convertible Preferred Stock, and Shareholders' Equity
Current Liabilities:
Accounts payable........................................................ $ 446 $ 984
Accrued expenses........................................................ 2,250 3,152
Deferred revenue........................................................ 1,382 756
Current portion of financing obligation................................. 126 74
---------------------------------
Total Current Liabilities............................................ 4,204 4,966
Long Term Liabilities:
Long term debt.......................................................... -- 10,000
Financing obligation.................................................... 3,246 3,341
Other long term liabilities............................................. 223 228
---------------------------------
Total Long Term Liabilities.......................................... 3,469 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 September 30, 1999; aggregate liquidation value of $15,203 at
September 30, 1999................................................... 13,032 --
---------------------------------
Total Redeemable Convertible Preferred Stock......................... 13,032 12,914
---------------------------------
Shareholders' Equity:
Class A Common Stock, $5.00 par value, 12,000,000 shares authorized; issued
and outstanding 5,040,655 shares at September 30, 1999 and 3,731,950 at
December 31, 1998 (after adjustment of one-for-five
reverse stock split)................................................. 25,203 18,660
Class B Common Stock, $5.00 par value, 400,000 shares authorized;
issued and outstanding 14,227 shares at September 30, 1999 and 14,282 at
December 31, 1998 (after adjustment of one-for-five reverse
stock split) 71 71
Additional paid-in capital.............................................. 63,774 52,885
Accumulated deficit..................................................... (83,284) (68,767)
---------------------------------
5,764 2,849
Accumulated other comprehensive loss ................................... (269) (196)
Treasury Stock, 100,000 shares of Class A Common Stock, at cost......... (281) (281)
---------------------------------
Total Shareholders' Equity .......................................... 5,214 2,372
---------------------------------
Total Liabilities, Redeemable Convertible Preferred Stock, and
Shareholders' Equity ................................................ $ 25,919 $ 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 Nine months ended
September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------ ------------------
License and related revenue....................... $ 245 $ 1,451 $ 1,015 $ 2,419
Services and related revenue...................... 1,509 1,257 3,424 3,251
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1,754 2,708 4,439 5,670
Cost of revenues.................................. 1,374 2,490 4,139 8,540
Research and development.......................... 340 186 1,235 520
Selling and marketing............................. 1,794 1,543 4,753 3,725
General and administrative........................ 1,683 1,527 5,732 4,773
Non-cash debt conversion charge................... -- -- 3,506 --
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5,191 5,746 19,365 17,558
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Loss from continuing operations before other
income (expense) and income tax benefit..... (3,437) (3,038) (14,926) (11,888)
Other income (expense), net....................... 57 (202) 141 (645)
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Net loss from continuing operations............... (3,380) (3,240) (14,785) (12,533)
Discontinued Operations:
Gain from sale of discontinued operations......... -- -- 1,044 --
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Net loss.......................................... (3,380) (3,240) (13,741) (12,533)
Less: Dividends on Redeemable
Convertible Preferred Stock........ -- (443) (262) (1,376)
Accretion on Redeemable
Convertible Preferred Stock........ (396) -- (960) --
Credit on Exchange of Redeemable
Convertible Preferred Stock....... -- -- 445 --
================================== =====================================
Net loss available for common shareholders $ (3,776) $ (3,683) $ (14,518) $ (13,909)
================================== =====================================
Basic and diluted net gain (loss) per share
Continuing Operations.................. $ (0.75) $ (1.81) $ (3.48) $ (7.56)
Discontinued Operations............... -- -- 0.23 --
================================== =====================================
$ (0.75) $ (1.81) $ (3.25) $ (7.56)
================================== =====================================
Weighted average common shares
outstanding - basic and diluted.............. 5,054,000 2,030,000 4,463,000 1,841,000
See Notes to Consolidated Financial Statements.
Base Ten Systems, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(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 $ 52,885
========================== =========== =========== =========== ============ ===========
Conversions:
Common B to
Common A ............. 399 -- (266) -- --
Preferred A to
Common A ............. 28,695 29 -- -- (29)
Debenture to
Common A ............. 2,500,000 2,500 -- -- 10,609
Issuance of
Common Stock:
Acquisition of
Almedica Technology
Group ................ 3,950,000 3,950 -- -- (370)
Employee stock
purchase plan ........ 63,446 64 -- -- 2
Exercise of options .. 250 -- -- -- --
Retirement of shares as
a result of five-for-one
reverse stock split ...... (20,161,883) -- (56,917) -- --
Dividends on Redeemable
Preferred Stock .......... -- -- -- -- --
Accretion on Redeemable
Preferred Stock .......... -- -- -- -- --
Credit on exchange of
redeemable convertible
preferred stock .......... -- -- -- -- 677
Comprehensive Loss:
Net loss ............. -- -- -- -- --
Foreign currency
translation .......... -- -- -- -- --
Unrealized loss on
securities available
for sale ............. -- -- -- -- --
----------- ----------- ----------- ------------ -----------
Total Comprehensive
Loss ..................... -- -- -- -- --
========================== =========== =========== =========== ============ ===========
Balance at
September 30, 1999 ....... 5,040,655 $ 25,203 14,227 $ 71 $ 63,774
========================== =========== =========== =========== ============ ===========
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 ........ -- -- -- -- 66
Exercise of options .. -- -- -- -- --
Retirement of shares as
a result of five-for-one
reverse stock split ...... -- -- -- -- --
Dividends on Redeemable
Preferred Stock .......... (262) -- -- -- (262)
Accretion on Redeemable
Preferred Stock .......... (959) -- -- -- (959)
Credit on exchange of
redeemable convertible
preferred stock .......... 445 -- -- -- 1,122
Comprehensive Loss:
Net loss ............. (13,741) -- -- -- (13,741)
Foreign currency
translation .......... -- (57) -- -- (57)
Unrealized loss on
securities available
for sale ............. -- (16) -- -- (16)
----------- ----------- ----------- ------------ -----------
Total Comprehensive
Loss ..................... -- -- -- -- (13,814)
========================== =========== =========== =========== ============ ===========
Balance at
September 30, 1999 ....... $ (83,284) $ (269) (100,000) $ (281) $ 5,214
========================== =========== =========== =========== ============ ===========
Base Ten Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
(in thousands, except share and per share data)
Nine Months Nine Months
Ended Ended
September 30, 1999 September 30, 1998
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Cash Flows from Operating Activities:
Net loss from continuing operations .......................... $ (14,785) $ (12,533)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating
Activities:
Depreciation and amortization................................ 2,560 3,411
Non-cash debt conversion charge.............................. 3,506 --
Unrealized loss on investment in securities.................. 16 --
Changes in operating assets and liabilities: ...........................
Accounts receivable........................................... 268 (3,135)
Other current assets.......................................... 185 (306)
Accounts payable, accrued expenses and deferred revenue....... (1,813) (541)
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Net Cash Used in Operations............................................. (10,063) (13,104)
- ----------------------------------------------------------------------------- ------------------ -------------------
Cash Flows from Investing Activities:
Additions to property, plant and equipment ................... (281) (533)
Additions to capitalized software costs and other assets...... 373 (1,346)
Purchase of assets related to FlowStream product ............. -- (2,068)
Acquisition of Almedica, net of cash acquired ................ (51) --
- ----------------------------------------------------------------------------- ------------------ -------------------
Net Cash Provided by (Used in) Investing Activities..................... 41 (3,947)
- ----------------------------------------------------------------------------- ------------------ -------------------
Cash Flows from Financing Activities:
Proceeds from sale of discontinued operations................. 1,044 --
Repayment of amounts borrowed................................. (43) (103)
Proceeds from issuance of redeemable preferred stock.......... -- 9,625
Proceeds from issuance of common stock........................ 66 668
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Net Cash Provided from Financing Activities............................. 1,067 10,190
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Effect of Exchange Rate Changes on Cash................................. 57 (154)
- ----------------------------------------------------------------------------- ------------------ -------------------
Net (Decrease)/Increase In Cash and Cash Equivalents.................... (8,898) (7,015)
Cash, beginning of period............................................... 17,437 9,118
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Cash, end of period..................................................... $ 8,539 $ 2,103
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Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest................................ $ 520 $ 826
Base Ten Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 1999
(Unaudited)
A. Basis of Presentation and Liquidity
The Company's financial statements have been prepared on the basis that it
will continue as a going concern. The Company has incurred significant
operating losses and negative cash flows in recent years. 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. Concurrent with that debt conversion, the Company's Series A
Redeemable Convertible Preferred Stock was exchanged for Series B Redeemable
Convertible Preferred Stock. Holders of the Preferred Stock have the right
to require the Company to purchase their shares for cash upon the occurrence
of certain Redemption Events, which if triggered, 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. As a result of the debt conversion and the
recategorization of the Series B Redeemable Preferred Shares described
above, the Company's net tangible assets rose above the $4.0 million minimum
to $7.4 million at March 31, 1999.
On May 14, 1999, the NASD notified the Company that it intended to delist
the Class A Common Stock from NASDAQ NMS because the NASD believed that the
Company had failed to meet the NASDAQ NMS continued listing criteria. The
NASD specifically inquired about the Company's ability to meet the NASDAQ
NMS net tangible asset requirement and its minimum bid requirement. In
response to a hearing before the NASD in which the Company appealed the
NASD's determination, the listing of the Company's Class A Common Stock was
transferred to the NASDAQ SmallCap Market effective September 10, 1999. In
addition, the Company executed a one-for-five reverse stock split on
September 24, 1999 in order to comply with the NASD's minimum bid price
requirements. Under the rules of the NASDAQ SmallCap Market, the Company is
required to maintain minimum net tangible assets of $2 million and a $1.00
minimum bid price. The Company also executed a one-for-five reverse stock
split of Class B Common Stock effective September 24, 1999. See Note F to
the Consolidated Financial Statements.
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 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 cGMP guidelines, and improve our customer's overall
productivity. The Company's software systems include BASE10(R)ME and
BASE10(R)FS, which are "Manufacturing Execution Systems." BASE10(R)ME uses
Windows NT operating systems and BASE10(R) FS uses HP-UX and Digital
VAX/VMS operating systems. The Company's software systems also include
BASE10(R) CS, BASE10(R)ADLS and BASE10(R)ADMS, which are "Clinical Supply
Chain Management Solutions." These software systems assist clinical
specialists in managing supplies for clinical trials. BASE10(R)CS uses
Windows NT operating systems. BASE10(R)ADLS and BASE10(R)ADMS, formerly
known as ADLS and ADMS, respectively, were acquired from Almedica
International, Inc. See Note D to the Consolidated Financial Statements.
The Company also develops and markets other medical devices, including
uPACs(TM) 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, the Company formed a
limited liability company ("LLC") with an individual investor who is
currently a principal stockholder of the Company. The Company contributed
uPACs(TM) technology to the LLC, and the investor contributed $3 million
to the LLC to fund required further development of the technology. Base
Ten has a 9% interest in the LLC and the investor has a 91% interest in
the LLC. 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, which
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 nine months ended September
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.
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. The
Company's investment in the LLC is recorded under the equity
method and is fully reserved until the LLC obtains additional
financing.
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 SmallCap Market continued listing
criteria, which includes minimum net tangible assets of $2
million and minimum bid price of $1.
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. Earnings Per Share data has been
restated for comparative purposes to reflect the impact of the
one-for-five reverse stock split executed in September 1999. 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 Nine Months Nine Months
Ended Ended Ended Ended
September 30, 1999 September 30, September 30, September 30,
1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Loss per common share-basic:
Net loss from continuing operations $ (3,380) $ (3,240) $ (13,741) $ (12,533)
Add: Gain from sale of discontinued operations -- -- 1,044 --
Less: Dividend on Series A Preferred Stock -- (443) (262) (1,376)
Accretion on Series A Preferred Stock (396) -- (960) --
Credit on exchange of 445
Redeemable Convertible -- --
Preferred Stock --
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss to common shareholders (numerator) $ (3,776) $ (3,683) $ (14,518) $ (13,909)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares - basic (denominator) 5,054,000 2,030,000 4,463,000 1,841,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss per common share-basic $ (.75) $ (1.81) $ (3.25) $ (7.56)
- ------------------------------------------------------------------------------------------------------------------------------------
Loss per common share-fully diluted:
Net loss from continuing operations $ (3,380) $ (3,240) $ (13,741) $ (12,533)
Add: Gain from sale of discontinued operations -- -- 1,044 --
Less: Dividend on Series A Preferred Stock -- (443) (262) (1,376)
Accretion on Series A Preferred Stock (396) -- (960) --
Credit on exchange of Redeemable
Convertible Preferred Stock -- -- 445 --
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss to common shareholders (numerator) $ (3,776) $ (3,683) $ (14,518) $ (10,226)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares 5,054,000 2,030,000 4,463,000 1,841,000
Effect of dilutive options / warrants -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares-fully diluted (denominator) 5,054,000 2,030,000 4,463,000 1,841,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss per common share-diluted $ (.75) $ (1.81) $ (3.25) $ (7.56)
- ------------------------------------------------------------------------------------------------------------------------------------
Stock options, warrants and rights would have an anti-dilutive
effect on earnings per share for the periods ended September 30,
1999 and 1998 and, therefore, were not included in the
calculation of fully diluted earnings per share.
5. Reclassifications - Certain reclassifications have been made to
prior year financial statements to conform to the current year
presentation.
D. Acquisitions
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 3,950,000 shares of
Class A Common Stock (790,000 after adjustment for the September, 1999
reverse stock split). At the time of the purchase, Class A Stock traded
for $.90625 per share ($4.53125 after adjustment for the September, 1999
reverse stock split). 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.
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 (75,000 after adjustment for the reverse stock split). 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 (77,000 after adjustment for the reverse stock
split) were issued to the holders of the Series A Preferred Stock, net
of cash offering costs of approximately $245,000, resulting in net
proceeds of $9,380,000. The Company allocated the net proceeds of the
second tranche of Series A Preferred Stock and the warrants based upon
their relative fair values resulting in $8,529,000 assigned to the
Series A Preferred Stock and $851,000 to the warrants. Such proceeds
were received on January 2, 1998, and were recorded as subscriptions
receivable at December 31, 1997.
During 1998, 5,798 shares of Series A Preferred Stock were converted
into 1,917,806 shares of Class A Common Stock (383,561 after adjustment
for the September 1999 reverse stock split) and 1,740 shares of Series A
Preferred Stock were issued as dividends resulting in 14,942 shares of
Series A Preferred Stock outstanding at December 31, 1998.
On March 5, 1999, the outstanding Series A Preferred Stock and warrants
were exchanged for Series B Convertible Preferred Stock, $1.00 par
value, ("Series B Preferred Stock"). As a result, approximately 15,203
shares of Series B Preferred Stock, with a principal amount of
approximately $15,203,000 were exchanged for the outstanding shares of
Series A Preferred Stock. In addition, 632,000 new Warrants (126,400
after adjustment for the reverse stock split) were issued to Series B
Preferred Stockholders, and 720,000 Warrants (144,000 after adjustment
for the reverse stock split) were issued to replace certain original
Warrants issued in December 1997. The Series B Preferred Stock and
Warrants 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 ($20.00 after adjustment for the September 1999 reverse
stock split). 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 (608,000 shares after adjustment for the
September 1999 reverse stock split); (b) the Series B Preferred Stock
does not provide the holder with the option to receive a subordinated 8%
promissory note because of the elimination of the 3,040,000 share
limitation (608,000 shares after adjustment for the September 1999
reverse stock split); and (c) the Series B Preferred Stock does not
provide for a dividend payment based on the market price of the Class A
Common Stock. As a result of the exchange of Series A Preferred Stock
for Series B Preferred Stock, preferred stock dividends are no longer
required to be paid by the Company.
The Series B Preferred Stock is convertible at any time or from time to
time into Class A Common Stock at a conversion price of $4.00 ($20.00
after adjustment for the September 1999 reverse stock split).
The Series B Preferred Stock matures on December 15, 2000. On the
maturity date, the Company must redeem the outstanding preferred stock
at its Mandatory Redemption Price, which is the sum of the purchase
price, accrued but unpaid dividends and other contingent payments as
provided pursuant to the terms of the Series B Preferred Stock. The
portion of the Mandatory Redemption Price constituting such other
contingent payments is payable in cash whereas the purchase price and
accrued but unpaid dividends are payable in cash or common stock at the
option of the Company. 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 third quarter of 1999 aggregated approximately
$427,800. 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 the NASD NMS or NASD SmallCap Markets of the Class A
Common Stock for an aggregate of 30 trading days in any 18 month period;
b) failure by the Company to cause the holders to be able to utilize the
registration statement filed for the resale of the shares of the Class A
Common Stock shares into which the Series B Preferred Stock is
convertible; c) failure to issue Class A Common Stock upon exercise of
conversion rights by a preferred shareholder; or d) failure to pay any
amounts due to preferred shareholders. The cash purchase price upon
occurrence of a Redemption Event 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 (1,413,693 after
adjustment for the reverse stock split) 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 (16,000 after
adjustment for the reverse stock split) 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 ($20.00 after adjustment for the reverse stock
split) or more for 20 consecutive trading days and the aggregate of cash
(and cash equivalents) as shown on the Company's most recent balance
sheet is $5,000,000 or more. If there is a forced exercise, the exercise
price of certain other existing warrants held by the Series B Preferred
Stockholders would be modified to the lesser of (i) market value and
(ii) the exercise price then in effect. See Note H to the Consolidated
Financial Statements.
F. Reverse Stock Split
On September 24, 1999, the Company executed a one-for-five reverse split
of the Company's Class A Common and Class B Common Stock. Under the
terms of the split, each shareholder received one share of Class A
Common $5 par value stock for every five shares, or fraction thereof, of
Class A Common $1 par value stock owned as of the transaction date. In
addition, shareholders received one share of Class B Common $5 par value
stock for every five shares, or fraction thereof, of Class B Common $1
par value stock owned as of September 24, 1999. As a result of the
reverse stock split, the Company retired 20,161,883 shares of Class A
Common Stock and 56,917 shares of Class B Common Stock. The prices for
shares of the Company's Class A Common Stock traded through the NASD
SmallCap Market reflected the reverse stock split as of September 24,
1999, while trading of Class B Common Stock on the Bulletin Board
reflected the reverse stock split as of November 8, 1999. All references
in the consolidated balance sheets and the consolidated statements of
operations to shares and per share data have been adjusted retroactive
to January 1, 1998 in response to the reverse stock split.
G. 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 nine months ended September 30, 1999 and 1998 (dollars in
thousands):
United States Europe Eliminations Consolidated
- -------------------------------------------- ------------------- ---------------------- --------------------- ----------------------
Nine Months Ended September 30, 1999:
Revenues from unaffiliated sources $ 1,549 $ 2,890 $ -- $ 4,439
- -------------------------------------------- ------------------- ---------------------- --------------------- ----------------------
Identifiable assets at September 30, 1999 $ 35,476 $ 1,078 $ (10,635) $ 25,919
- -------------------------------------------- ------------------- ---------------------- --------------------- ----------------------
Nine Months Ended September 30, 1998:
- -------------------------------------------- ------------------- ---------------------- --------------------- ----------------------
Revenues from unaffiliated sources $ 3,073 $ 2,597 $ -- $ 5,670
- -------------------------------------------- ------------------- ---------------------- --------------------- ----------------------
Identifiable assets at September 30, 1998 $ 27,403 $ 1,731 $ (7,055) $ 21,596
- -------------------------------------------- ------------------- ---------------------- --------------------- ----------------------
H. 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.
I. Subsequent Events
On October 28, 1999, Thomas E. Gardner resigned as President, Chief
Executive Officer and Chairman of the Board of Directors of the Company.
Stephen A. Cloughley was hired as President and Chief Executive Officer
and Robert Hurwitz was named by the Board of Directors as Chairman of
the Board.
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 September 30, 1999 compared with Three Months ended September
30, 1998
Continuing Operations
Revenues. Revenues decreased 35% to $1.8 million in the three-month
period ended September 30, 1999 as compared to $2.7 million in the period
ended September 30, 1998. The revenue decreased due to a lengthening sales
cycle experienced by the Company. Delays in the sales decision are, to a
large extent, the result of concerns affecting all software developers of the
impact of Y2K. Revenues for the third quarter of 1999 were derived 14% from
software licenses and enhancements, 35% from maintenance and 51% from support
services, compared to revenues for the third quarter of 1998 which were
derived 54% from software licenses and enhancements, 14% from maintenance and
32% from support services.
Cost of Sales. Cost of sales, which includes amortization of software
development costs for PHARMASYST(TM) and BASE10(R)ME, decreased 45% to $1.4
million in the third quarter of 1999 from $2.5 million in the third quarter
of 1998. The decrease is primarily the result of a reduction of $0.2 million
in labor and related expenses and a $.6 million reduction of amortization of
software development costs.
Research and Development Costs. Research and development costs increased
to $0.3 million in the third quarter of 1999 as compared to $0.2 million in
the third quarter of 1998. 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 third quarter of 1999 to $1.8 million from $1.5 million in the third
quarter of 1998. 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 $1.7 million in the third quarter of 1999 as compared to $1.5 million
in the third quarter of 1998. This change was principally due to increased
realized expenses of $0.1 million related to the uPACS(TM) operation, which
the Company began funding in January 1999 and $0.1 million in amortization of
assets acquired in June 1999 from Almedica International Inc.
Other Income and Expense. Other income and expense improved by $0.3
million to a net income of $0.1 million in the third quarter of 1999 from a
net expense of $0.2 million in the third quarter of 1998. Other income and
expense in 1999 is primarily comprised of interest income of $0.1 million
earned on investments and a note receivable from Strategic Technology
Systems, Inc. ("Strategic") offset by interest expense of $0.1 million. In
the third quarter of 1998, other expense was comprised of interest expense of
$0.3 million, offset by $0.1 million of interest and other income. Interest
expense decreased in the third quarter of 1999 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 $3.4 million in
the quarter ended September 30, 1999, compared to a $3.2 million net loss in
1998. The loss in the third quarter of 1999 was $0.2 million higher than the
comparable period in 1998 despite a reduction in revenue of $1.0 million.
Operating expenses decreased $0.5 million to $5.2 million in 1999 from $5.7
million in the 1998 period due to decreases in cost of sales ($1.1 million)
offset by increases in research and development ($0.2 million), selling and
marketing ($0.3 million) and general and administrative ($0.2 million). Other
income and expenses improved in the third quarter of 1999 by $0.3 million.
The Company expects additional losses during the remainder of 1999. However,
the Company's sales backlog has increased as a result of expanded marketing
efforts and the release of version 3.2 of BASE10(R)ME, which is expected to
generate increased revenues in the future. The Company's ability to achieve
profitable operations is dependent upon, among other things, ongoing
successful development and maintenance of its BASE10(R)ME, BASE10(R)CS,
BASE10(R)FS, BASE10(R)ADLS and BASE10(R)ADMS systems; timely delivery,
successful installation and acceptance of its systems by its customers; and
successful competition in the markets in which the Company participates.
Nine Months ended September 30, 1999 compared with Nine Months ended September
30, 1998.
Continuing Operations
Revenues. Revenues were $4.4 million in the nine months ended September
30, 1999 as compared to $5.7 million in the comparable period in 1998. The
revenue decreased due to a lengthening sales cycle experienced by the
Company. Delays in the sales decision are, to a large extent, the result of
concerns affecting all software developers of the impact of Y2K. Revenues for
the nine months ended September 30, 1999 were derived 23% from software
licenses and product enhancements, 51% from solutions services and 26% from
maintenance, compared to 43% from software licenses and product enhancements,
44% from solutions services and 13% from maintenance in the nine months ended
September 30, 1998.
Cost of Sales. Cost of sales during the nine months ended September 30,
1999 decreased 52% to $4.1 million from $8.5 million in the nine months ended
September 30, 1998. In the nine months ended September 30, 1999, salary and
related expenses in cost of sales were approximately $2.5 million, as
compared to $3.8 million in the nine months ended September 30, 1998,
representing a decrease of $1.3 million. In addition, outsourced labor
decreased by $0.6 million and amortization of software development costs
decreased by $1.6 million during the nine months ended September 30, 1999.
Research and Development Costs. Research and development costs increased
to $1.2 million in the nine months ended September 30, 1999 as compared to
$0.5 million in the nine months ended September 30, 1998. This increase is
related to additional salaries and related expenses in the nine months ended
September 30, 1999. 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 28%
in the nine months ended September 30, 1999 to $4.8 million, from $3.7
million in the nine months ended September 30, 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 nine months ended September 30, 1999 to $5.7 million, from
$4.8 million in the nine months ended September 30, 1998. The increase was
primarily due to an additional $0.5 million for professional fees in 1999 as
well as $0.6 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 nine months ended September 30, 1999 from a net
expense of $.7 million in the first nine 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 $0.6 million in the nine
months ended September 30, 1999 and $0.4 million in the nine months ended
September 30, 1998. Interest expense decreased from $1.2 million in the nine
months ended September 30, 1998 to $0.5 in the nine months ended September
30, 1999 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 $14.8 million in the nine months ended September 30, 1999,
compared to a $12.5 million net loss for the nine month period ended
September 30, 1998. Of the loss in the nine months ended September 30, 1999,
$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 nine months ended September 30
was $1.3 million less in 1999 than in 1998. Revenue was $1.2 million lower in
the nine months ended September 30, 1999 than in the nine months ended
September 30, 1998. Cost of revenues decreased by $4.4 million, but this was
partially offset by increases in research and development ($0.7 million),
selling and marketing ($1.0 million), and general and administrative expenses
($1.0 million). Other income and expenses improved in the nine months ended
September 30, 1999 by $0.8 million. The Company expects additional losses
during the remainder of 1999. However, the Company's sales backlog has
increased as a result of expanded marketing efforts and the release of
version 3.2 of BASE10(R)ME, which is expected to generate increased revenues
in subsequent periods. The Company's ability to achieve profitable operations
is dependent upon, among other things, ongoing successful development and
maintenance of its BASE10(R)ME, BASE10(R)CS, BASE10(R)FS, BASE10(R)ADLS and
BASE10(R)ADMS systems; timely delivery, 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.
Other Events in 1999
The Company is relying on its leading products, BASE10(R)ME, BASE10(R)CS,
BASE10(R)FS, BASE10(R)ADLS and BASE10(R)ADMS, to stimulate new orders. Neither
the additional development of the Company's MES products nor the consequential
generation of cash can be assured, either in time or amount, nor is there any
assurance that such amounts will be sufficient for the Company's needs. In the
absence of such orders or the promise thereof, neither of which can be assured,
as well as in connection with its expected capital needs for the year 2000 and
beyond, the Company may elect to seek additional sources of capital and may also
elect to reduce the pace of its development of its products and/or establish
other cost reduction measures, which could adversely impact the Company. In the
event the Company elects to seek additional capital there can be no assurance
that such funds or capital would be available on the terms or in the amounts
needed.
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 (790,000 shares after adjustment for the reverse stock split). At the time
of the purchase, Class A Common Stock traded for $.90625 per share ($4.53125 per
share after adjustment for the reverse stock split). 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, Robert J. Bronstein,
formerly President of Almedica, joined the Company as President, Applications
Software Division. As a result of this acquisition, the Company now markets
BASE10(R)ADLS and BASE10(R)ADMS, which are the clinical supplies management
systems.
In April, 1999, Drew Sycoff, a principal of Andrew Garrett, Inc., 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, nominated
John C. Rhineberger and Robert Hurwitz 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. On October 28, 1999,
Thomas E. Gardner resigned as President, Chief Executive Officer and Chairman of
the Board of Directors of the Company. Stephen A. Cloughley was hired as
President and Chief Executive Officer and Mr. Hurwitz was named by the Board of
Directors as Chairman of the Board.
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 two years.
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 has been 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. All hardware or software systems that were not Y2K
compliant have been either replaced or remediated.
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(R)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(R) which have not been tested
by the Company for Y2K compliance. All of the customers that have purchased
these earlier versions have had substantial customization done, which dictates
that Y2K testing and modifications must be done on a case by case basis. These
customers 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(R)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 is not aware of any computer system that
is not Y2K compliant. Accordingly, the Company does not anticipate that the cost
of unforeseen Y2K Problems, if any, will have a material adverse affect on its
operations.
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 resolved all Y2K Problems that could have a material adverse
affect 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(R) 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 has implemented contingency plans developed
as part of its effort to identify and correct Y2K Problems that may affect its
internal systems, software and third party suppliers. These plans included
accelerated replacement of affected third party equipment and software and
hardware. 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(R) 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 $7.1 million
during the nine months ended September 30, 1999. The Company had $8.5 million of
cash at September 30, 1999 whereas the Company had $17.4 million of cash at
December 31, 1998. The decrease in cash during the six months ended September
30, 1999 resulted primarily from cash used in operations of $10.2 million.
In 1999, cash used in operations has been affected primarily by the net
loss of $14.8 million (partially 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. 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.
Concurrent with that debt conversion, the Company's Series A Redeemable
Convertible Preferred Stock was exchanged for Series B Redeemable Convertible
Preferred Stock. Holders of the Preferred Stock have the right to require the
Company to purchase their shares for cash upon the occurrence of certain
Redemption Events, which if triggered, 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. As a result of the debt
conversion and the recategorization of the Series B Redeemable Preferred Shares
described above, the Company's net tangible assets rose above the $4.0 million
minimum to $7.4 million at March 31, 1999.
On May 14, 1999, the NASD notified the Company that it intended to delist
the Class A Common Stock from NASDAQ NMS because the NASD believed that the
Company had failed to meet the NASDAQ NMS continued listing criteria. The NASD
specifically inquired about the Company's ability to meet the NASDAQ NMS net
tangible asset requirement and its minimum bid requirement. In response to a
hearing before the NASD in which the Company appealed the NASD's determination,
the listing of the Company's Class A Common Stock was transferred to the NASDAQ
SmallCap Market effective September 10, 1999. In addition, the Company executed
a one-for-five reverse stock split on September 24, 1999 in order to comply with
the NASD's minimum bid price requirements. Under the rules of the NASDAQ
SmallCap Market, the Company is required to maintain minimum net tangible assets
of $2 million and a $1.00 minimum bid price. The Company also executed a
one-for-five reverse stock split of Class B Common Stock effective September 24,
1999. See Note F to the Consolidated Financial Statements.
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 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.
The March 5, 1999 conversions by the holder of the $10 million 9.01%
convertible debenture into 2,500,000 shares of Class A Common Stock (500,000
shares after adjustment for the reverse stock split) 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 ($20.00 after adjustment for the reverse stock split)
or more, the Series B Preferred Stockholders received four-year warrants to
purchase 80,000 shares of Class A Common Stock (16,000 shares after adjustment
for the reverse stock split) exercisable at $3.00 per share ($15.00 per share
after the reverse stock split). The issuance of one-half of the warrants was
effected by modifying certain provisions of existing warrants held by the Series
B Preferred Stockholders. The Company may force the exercise of the warrants if,
among other things, the Class A Common Stock trades at $4.00 ($20.00 after
adjustment for the reverse stock split ) or more for 20 consecutive trading days
and the aggregate of cash (and cash equivalents) as shown on the Company's most
recent balance sheet is $5,000,000 or more. If there is a forced exercise, the
exercise price of certain other existing warrants held by the Series B Preferred
Stockholders would be modified to the lesser of (i) market value and (ii) the
exercise price then in effect.
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
identified. The Company continues to fund the enhancement of the LLC's product
and seeks to identify a potential beta site for its technology .
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 streamlining operations and reducing
operating expenses. Further cost cutting measures were announced in November,
1999. The full effect of these changes will not be realized until 2000.
Forward Looking Statements
The foregoing contains forward looking information within the meaning of
The Private Securities Litigation Reform Act of 1995. Such forward looking
statements and paragraphs may be identified by such forward looking terminology
as "may", "will", "believe", "anticipate", or similar words or variations
thereof. Such forward looking statements involve certain risks and uncertainties
including the particular factors described more fully above in 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(R)ME and
BASE10(R)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 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27 Financial Data Schedule (Edgar filing only).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which this
report on Form 10-Q is filed.
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: November 12, 1999
Base Ten Systems, Inc.
(Registrant)
By: STEPHEN A. CLOUGHLEY
------------------------------------------
Stephen A. Cloughley
President and Chief Executive Officer
(Principal Executive Officer)
By: WILLIAM F. HACKETT
-------------------------------------------
William F. Hackett
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer)
Exhibit Index
Exhibit No. Description
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27 Financial Data Schedule