-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VDAb8nvlwaSDmVz/oY+NFcsrH+JgcwyE0KaAaND9nDKcWRetunZinz/eYtSMNJGV e247iqdCuZKcXy9fVb2dSQ== 0000927796-98-000232.txt : 19980814 0000927796-98-000232.hdr.sgml : 19980814 ACCESSION NUMBER: 0000927796-98-000232 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BASE TEN SYSTEMS INC CENTRAL INDEX KEY: 0000010242 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 221804206 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-07100 FILM NUMBER: 98686719 BUSINESS ADDRESS: STREET 1: ONE ELECTRONICS DR CITY: TRENTON STATE: NJ ZIP: 08619 BUSINESS PHONE: 6095867010 MAIL ADDRESS: STREET 1: ONE ELECTRONICS DR CITY: TRENTON STATE: NJ ZIP: 08619 10-Q 1 QUARTERLY REPORT ON FORM 10-Q 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, 1998 Commission File No. 0-7100 BASE TEN SYSTEMS, INC. (Exact name of registrant as specified in its charter) NEW JERSEY 22-1804206 (State of incorporation) (I.R.S. Employer Identification No.) ONE ELECTRONICS DRIVE TRENTON, N.J. 08619 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (609) 586-7010 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES /x/ NO /_/ Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. TITLE OF CLASS OUTSTANDING AT AUGUST 12, 1998 Class A Common Stock, $1.00 par value 10,091,951 Class B Common Stock, $1.00 par value 79,685 BASE TEN SYSTEMS, INC. AND SUBSIDIARIES INDEX Part I. Financial Information Page Consolidated Balance Sheets -- June 30, 1998 (unaudited) and October 31, 1997 (audited)................................... 1 Consolidated Statements of Operations -- Three months and six months ended June 30, 1998 and July 31, 1997 (unaudited)...................2 Consolidated Statements of Shareholders' Equity -- Six months ended June 30, 1998 (unaudited)..............................3 Consolidated Statements of Cash Flows -- Six months ended June 30, 1998 and July 31, 1997 (unaudited).........................4 Notes to Consolidated Financial Statements..........................5 Management's Discussion and Analysis of Financial Condition and Results of Operations................................11 Part II. Other Information Item 2: Changes in Securities...................................18 Item 4: Submission of Matters to a Vote of Security Holders.....19 Item 6: Exhibits and Reports on Form 8-K........................20 BASE TEN SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
AS OF AS OF JUNE 30, 1998 OCTOBER 31, 1997 ------------- ---------------- (UNAUDITED) (AUDITED) CURRENT ASSETS: Cash.............................................................. $ 4,704,000 $ 1,502,000 Accounts receivable (including unbilled receivables of $915,000 at June 30, 1998 and $1,444,000 at October 31, 1997).. 3,216,000 1,808,000 Net assets held for sale.......................................... -- 5,338,000 Other current assets (including inventories of $286,000 at June 30, 1998 and $478,000 at October 31, 1997)............................ 860,000 1,044,000 ----------------- ----------------- TOTAL CURRENT ASSETS............................................ 8,780,000 9,692,000 PROPERTY, PLANT AND EQUIPMENT........................................... 5,517,000 4,305,000 NOTE RECEIVABLE......................................................... 1,975,000 -- OTHER ASSETS............................................................ 7,852,000 7,220,000 ----------------- ----------------- $ 24,124,000 $ 21,217,000 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.................................................. $ 915,000 $ 962,000 Accrued expenses.................................................. 3,447,000 6,005,000 Current portion of capital lease obligation....................... 54,000 54,000 ----------------- ----------------- TOTAL CURRENT LIABILITIES....................................... 4,416,000 7,021,000 LONG TERM LIABILITIES: Long-term debt.................................................... 11,700,000 15,500,000 Capital lease obligation.......................................... 3,388,000 3,425,000 Other long-term liabilities....................................... 228,000 253,000 ----------------- ----------------- TOTAL LONG-TERM LIABILITIES..................................... 15,316,000 19,178,000 SHAREHOLDERS' EQUITY (DEFICIENCY) Preferred stock, $1.00 par value, 950,000 shares authorized; issued and outstanding 19,308 shares at June 30, 1998................................. 19,000 -- Class A Common Stock, $1.00 par value, 40,000,000 shares authorized; issued and outstanding 9,472,648 shares at June 30, 1998 and 7,768,952 shares at October 31, 1997........................................................... 9,473,000 7,769,000 Class B Common Stock, $1.00 par value, 2,000,000 shares authorized; issued and outstanding 85,678 shares at June 30, 1998 and 445,121 shares at October 31, 1997 86,000 445,000 Additional paid-in capital....................................... 50,789,000 29,458,000 Deficit.......................................................... (55,814,000) (42,647,000) ----------------- ----------------- 4,553,000 (4,975,000) Equity adjustment from foreign currency translation.............. (236,000) (150,000) Unrealized gain on securities available for sale................. 75,000 143,000 ----------------- ----------------- 4,392,000 (4,982,000) ----------------- ----------------- $ 24,124,000 $ 21,217,000 ================= =================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BASE TEN SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- JUNE 30, 1998 JULY 31, 1997 JUNE 30, 1998 JULY 31, 1997 ------------- ------------- ------------- ------------- REVENUE Sales...................................... $ 2,052,000 $ 888,000 $ 2,963,000 $ 1,357,000 ------------- ------------- ------------- ------------- COSTS AND EXPENSE: Cost of sales.............................. 2,716,000 1,178,000 4,328,000 1,693,000 Amortization of software development costs. 927,000 440,000 1,810,000 778,000 Research and development................... 194,000 45,000 334,000 84,000 Sales and marketing........................ 1,017,000 629,000 2,213,000 1,299,000 General and administrative................. 1,892,000 499,000 3,128,000 998,000 ------------- ------------- ------------- ------------- 6,746,000 2,791,000 11,813,000 4,852,000 ------------- ------------- ------------- ------------- OPERATING LOSS.................................. (4,694,000) (1,903,000) (8,850,000) (3,495,000) OTHER INCOME (EXPENSE).......................... (204,000) (389,000) (443,000) (738,000) ------------- ------------- ------------- ------------- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT (4,898,000) (2,292,000) (9,293,000) (4,233,000) INCOME TAX BENEFIT.............................. -- -- -- -- ------------- ------------- ------------- ------------- NET LOSS FROM CONTINUING OPERATIONS............. (4,898,000) (2,292,000) (9,293,000) (4,233,000) ------------- ------------- ------------- ------------- DISCONTINUED OPERATIONS: LOSS FROM DISCONTINUED OPERATIONS............... -- (525,000) -- (1,017,000) ------------- ------------- ------------- ------------- NET LOSS........................................ $ (4,898,000) $ (2,817,000) $ (9,293,000) $ (5,250,000) ============= ============= ============= ============= LOSS PER COMMON SHARE: Continuing Operations $ (.59) $ (.29) $ (1.17) $ (.54) Discontinued Operations..................... -- (.07) -- (.13) ------------- ------------- ------------- ------------- NET LOSS PER COMMON SHARE....................... $ (.59) $ (.36) $ (1.17) (.67) ============= ============= ============= ============= WEIGHTED AVERAGE COMMON SHARES.................. 9,132,800 7,929,000 8,732,700 7,877,900 ------------- ------------- ------------- ------------- LOSS PER COMMON SHARE-ASSUMING DILUTION: Continuing Operations $ (.59) $ (.29) $ (1.17) $ (.54) Discontinued Operations..................... -- (.07) -- (.13) ------------- ------------- ------------- ------------- NET LOSS PER COMMON SHARE-ASSUMING DILUTION..... $ (.59) $ (.36) $ (1.17) $ (.67) ============= ============= ============= ============= WEIGHTED AVERAGE COMMON SHARES-ASSUMING DILUTION........................................ 9,132,800 7,929,000 8,732,700 7,877,900 ------------- ------------- ------------- -------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) Equity Common Stock Preferred Stock Adjustment Unrealized --------------------------------------- --------------- From Gain on Class A Class B Additional Foreign Securities ------- Paid-in Currency Available Shares Amount Shares Amount Shares Amount Capital Deficit Translation for Sale ------ ------ ------ ------ ------ ------ ------- ------- ----------- --------- Balance- December 31, 1997 7,828,719 $7,829,000 445,121 $ 445,000 9,375 $ 9,000 $37,991,000 $(46,521,000) $(195,000) $ 62,000 Conversions of: Class B Common to Class A Common 546,580 547,000 (364,389) (364,000) -- -- (183,000) -- -- -- Preferred Stock to Class A Common 104,944 105,000 -- -- (625) (1,000) (104,000) -- -- -- Convertible Debenture to Class A Common 815,949 816,000 -- -- -- -- 2,984,000 -- -- -- Exercise of options 150,232 150,000 4,946 5,000 -- -- 525,000 -- -- -- Issuance of Common Stock 26,224 26,000 -- -- -- -- 162,000 -- -- -- Issuance of Preferred Stock -- -- -- -- 10,558 11,000 9,414,000 -- -- -- Foreign currency translation -- -- -- -- -- -- -- -- (41,000) -- Unrealized gain on securities available for sale -- -- -- -- -- -- -- -- -- 13,000 Net loss -- -- -- -- -- -- -- (9,293,000) -- -- Balance - ---------- ----------- ------- --------- --------- -------- ------------ ------------- ---------- -------- June 30, 1998 9,472,648 $9,473,000 85,678 $86,000 19,308 $19,000 $50,789,000 $(55,814,000) $(236,000) $75,000 ========== =========== ======= ========= ========= ======== ============ ============= ========== ========
SEE NOTES TO CONSOLIDATED STATEMENTS BASE TEN SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED SIX MONTHS ENDED ---------------------------------------------- JUNE 30, 1998 JULY 31, 1997 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (9,293,000) $ (5,250,000) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES: Depreciation and amortization............................. 2,192,000 1,024,000 CHANGES IN OPERATING ASSETS AND LIABILITIES: Accounts receivable....................................... (1,633,000) (599,000) Employee loan receivable - net of current portion......... -- 85,000 Other current assets...................................... 4,000 (1,149,000) Accounts payable and accrued expenses..................... (1,617,000) 212,000 Other assets.............................................. (1,346,000) (1,624,000) --------------- --------------- NET CASH USED IN OPERATIONS............................... (11,693,000) (7,301,000) --------------- --------------- CASH FLOWS USED IN INVESTING ACTIVITIES: Additions to property, plant and equipment-net............ (860,000) (292,000) Purchase of assets related to FlowStream product.......... (2,068,000) -- --------------- --------------- NET CASH USED IN INVESTING ACTIVITIES..................... (2,928,000) (292,000) --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of amounts borrowed............................. (45,000) (19,000) Proceeds from issuance of long-term debt.................. -- 5,500,000 Proceeds from issuance of common and preferred stock...... 10,293,000 615,000 --------------- --------------- NET CASH PROVIDED FROM FINANCING ACTIVITIES................................................ 10,248,000 6,096,000 --------------- --------------- Effect of exchange rates on cash.......................... (41,000) (5,000) --------------- --------------- NET INCREASE (DECREASE) IN CASH................................. (4,414,000) (1,502,000) CASH, beginning of period....................................... 9,118,000 5,273,000 --------------- --------------- CASH, end of period............................................. $4,704,000 $ 3,771,000 =============== =============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest.................. $ 706,000 $ 742,000 --------------- ---------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BASE TEN SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) A. DESCRIPTION OF BUSINESS Base Ten Systems, Inc. ("Base Ten" or the "Company") is engaged in the development of commercial applications focused on manufacturing execution systems, medical screening and image processing software. For the period ended July 31, 1997, the Company was also engaged, through its Government Technology Division, in the design and manufacture of electronic systems employing safety critical software for the defense industry. Effective December 31, 1997, the Government Technology Division was sold by the Company. See Note E below. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. In management's opinion, all adjustments necessary for a fair presentation of the financial statements are reflected in the accompanying statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The consolidated interim financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1997. The results of operations for the three months and six months ended June 30, 1998 are not necessarily indicative of the operating results for the full year. As a result of the change of the fiscal year end from October 31st to December 31st, the quarterly comparisons are between the second calendar quarter for 1998 and the third fiscal quarter for 1997, as indicated in the financial statements. The second quarter of 1998 includes the months of April, May and June; the comparative third quarter of fiscal year 1997 includes the months of May, June and July. Although there is a difference of one calendar month, management does not believe that the difference is significant. 2. Basis of Presentation - The consolidated financial statements include the accounts of Base Ten and its subsidiaries. All significant inter-company accounts, transactions and profits have been eliminated. As discussed more thoroughly in Note E, the results of operations of the Government Technology Division have been reported separately as discontinued operations for the period ended July 31, 1997. Net assets of the GTD were sold to Strategic Technology Systems, Inc. ("STS") at the close of business on December 31, 1997 and as such are not presented at June 30, 1998. Net assets of the GTD are reported as net assets held for sale at October 31, 1997. 3. Recently Issued Accounting Standards - In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 applies to entities with publicly held common stock or potential common stock and is effective for financial statements issued for periods ending after December 15, 1997. Accordingly, the Company implemented SFAS No. 128 for periods ended after December 15, 1997 (see Note B-4). In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 applies to all companies and is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for the reporting and display of comprehensive income in a set of financial statements. Comprehensive income is defined as the change in net assets of a business enterprise during a period from transactions generated from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Management believes that the adoption of SFAS No. 130 has not had a material impact on the financial statements. In June 1997, the Financial Accounting Standards Board issued Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 applies to all public companies and is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 requires that business segment financial information be reported in the financial statements utilizing the management approach. The management approach is defined as the manner in which management organizes the segments within the enterprise for making operating decisions and assessing performance. The Company has only one operating segment - providing software products and services to FDA regulated industries. Management believes the adoption of SFAS No. 131 has not had a material impact on the financial statements. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position 97-2, "Software Revenue Recognition," which is effective for transactions entered into in fiscal years beginning after December 15, 1997. The Statement of Position governs the recognition of revenue by enterprises that license, sell, lease or otherwise market software, except where software is incidental to the products or services being offered as a whole. Application of this Statement of Position has not had a material impact on the financial statements. 4. Net Loss Per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("FAS") No. 128, "Earnings per Share". FAS No. 128 specified the computation, presentation and disclosure requirements for earnings per share ("EPS") and became effective for both interim and annual periods ending after December 15, 1997. All prior period EPS data has been restated to conform to the provisions of FAS No. 128. The following is a reconciliation of the numerators and denominators used to calculate loss per share before extraordinary loss in the Consolidated Statements of Operations:
THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- JUNE 30, 1998 JULY 31, 1997 JUNE 30, 1998 JULY 31, 1997 ------------- ------------- ------------- ------------- Loss per common share: Net Loss.......................................... $ (4,898,000) $ (2,817,000) $ (9,293,000) $ (5,250,000) Less: Preferred stock dividends.................. (458,000) -- (933,000) -- ------------- ------------- ------------- ------------- Net Loss to common shareholders (numerator)....... $ (5,356,000) $ (2,817,000) $(10,226,000) $ (5,250,000) ============= ============= ============= ============= Weighted average shares (denominator)............. 9,132,800 7,929,000 8,732,700 7,877,900 ------------- ------------- ------------- ------------- Net loss per common share...................... $ (.59) $ (.36) $ (1.17) $ (.67) ============= ============= ============= ============= Loss per common share-assuming dilution: Net Loss.......................................... $ (4,898,000) $ (2,817,000) $ (9,293,000) $ (5,250,000) Less: Preferred stock dividends.................. (458,000) -- (933,000) -- ------------- ------------- ------------- ------------- Net Loss to common shareholders (numerator)....... $ (5,356,000) $ (2,817,000) $(10,226,000) $ (5,250,000) ============= ============= ============= ============= Weighted average shares........................... 9,132,800 7,929,000 8,732,700 7,877,900 Effect of Dilutive Options/Warrants............... -- -- -- -- ------------- ------------- ------------- ------------- Weighted averages shares-assuming dilution (denominator)................................ 9,132,800 7,929,000 8,732,700 7,877,900 ------------- ------------- ------------- ------------- Net loss per common share $ (.59) $ (.36) $ (1.17) $ (.67) ============= ============= ============= =============
During the three and six-month periods ended June 30, 1998 and July 31, 1997, there were no outstanding options included in the computation of diluted EPS as the Company had a net loss, and the effect of stock options, warrants and stock conversions would be anti-dilutive to earnings per share. 5. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. 6. Investments - The Company accounts for its investments using Statement of Financial Accounting Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS No. 115"). This standard requires that certain debt and equity securities 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, 1998 and October 31, 1997, all securities covered by FAS No. 115 were designated as available for sale. Accordingly, these securities are stated at fair value, with unrealized gains and losses reported in a separate component of shareholders' equity. Securities available for sale at June 30, 1998 and October 31, 1997, consisted of common stock with a cost basis of $50,000 and $150,000. Differences between cost and market of $75,000 and $143,000 were included as a separate component of shareholder's equity, "unrealized gain on securities available for sale", as of June 30, 1998 and October 31, 1997, respectively. 7. Reclassifications - Certain reclassifications have been made to prior year financial statements to conform to the current year presentation. C. ACQUISITIONS On February 19, 1998, the Company acquired certain assets and assumed certain liabilities of Consilium, Inc. ("Consilium"), for approximately $2,068,000, including transaction costs. This acquisition has been accounted for under the purchase method. Intangible assets of $2,450,000, which are included in other assets, are being amortized on the straight-line method over periods not exceeding fifteen years. The agreement also provides for additional payments based upon a percentage of the excess of targeted sales of the "FlowStream" product line, as defined, for the years ended December 31, 1998 and 1999, respectively. D. SALE OF CONVERTIBLE PREFERRED STOCK During December 1997 the Company executed the Series A Convertible Preferred Shares Agreement, in which it sold and issued $19 million of convertible preferred stock ("Preferred Stock") and Class A Stock purchase warrants (the "Warrants"). Initially the Company sold and issued $9.375 million of Preferred Stock and Warrants as of December 5, 1997, to several institutional investors. On December 31, 1997, after obtaining shareholder approval, the Company sold and issued a second installment of $9.625 million of Preferred Stock and Warrants to complete the $19 million sale and issuance. The second installment of $9.625 million was received as cash in January 1998. The Preferred Stock has a term of three years and pays a cumulative dividend of 8.0% per annum during any quarter in which the closing bid price for the Class A Stock is less than $8.00 for any ten consecutive trading days. An equivalent payment is payable to any holder of Preferred Stock which is subject during any quarter to a standstill period following a Company underwritten public offering or which is non-convertible because of the limitations described below. Such dividends and payments are payable only prior to conversion and payable in cash or additional Preferred Stock at Base Ten's option; however, if the Company elects to pay the dividend in Preferred Stock, the amount of such payment will be 125% of the cash amount. During each of the first and second quarters of 1998, the Company's Class A Stock closing bid price was below $8.00 for more than ten consecutive trading days. The Company paid the dividend in each quarter to its Preferred Stock shareholders in additional Preferred Stock. The Preferred Stock has a liquidation preference as to its principal amount and any accrued and unpaid dividends. The Preferred Stock is convertible at any time or from time to time into Class A Stock, at a conversion price equal to the lesser of (i) $16.25 per share or (ii) the Weighted Average Price (as defined) of the Class A Stock prior to the conversion date. In any event, no more than 3,040,000 shares of Class A Stock shall be issued upon conversion of all of the Preferred Stock. Any Preferred Stock remaining outstanding because of this limitation may be redeemed at the holder's option for a subordinated 8% promissory note maturing when the Preferred would have matured. The Company has the right, at any time, to redeem all or any part of the outstanding Preferred Stock or subordinated notes at 130% of their original purchase price, subject to certain limitations. Any shares of Preferred Stock or subordinated notes still outstanding three years after issuance must be redeemed in either cash, or at the Company's option, in Class A Stock. If the Company elects to make the redemption in Class A Stock, the amount of such payment will be 125% of the original purchase price. The holders of the Preferred Stock have the same voting rights as the holders of Class A Stock, calculated as if all outstanding shares of Preferred Stock had been converted into shares of Class A Stock on the record date for determination of shareholders entitled to vote on the matter presented. For each $1 million of Preferred Stock purchased, purchasers received five-year warrants to purchase 40,000 shares of Class A stock exercisable at $16.25 per share. If exercised these would represent an additional 760,000 shares of Class A Stock, or up to an aggregate of 3,800,000 shares of Class A Stock resulting from this sale (subject to adjustment in certain circumstances), assuming conversion of all Preferred Stock and exercise of all warrants. A registration statement ("Registration Statement") filed with the Securities and Exchange Commission ("SEC") registering for resale the Class A Stock underlying the Preferred Stock, including any Preferred Stock which may be issued as a dividend, and the Warrants, was declared effective by the SEC on February 19, 1998. The holders have agreed, if requested by a managing underwriter, to a maximum 90-day standstill period following any underwritten Company public offering, but not in excess of two such standstills (or more than 90 days) in any 18-month period. In the event a standstill period is effective, the maturity date of the Preferred Stock would be extended by the duration of the standstill period. See discussion under "Footnote F - Subsequent Events" regarding the proposed restructuring of the above referenced Series A Convertible Preferred Shares Agreement. E. DISCONTINUED OPERATIONS On October 27, 1997 the Company entered into an agreement to sell its Government Technology Division ("GTD") to Strategic Technology Systems, Inc. ("STS"). Accordingly, the operating results of the GTD have been segregated from continuing operations and reported as a separate line item on the consolidated statements of operations for the three and six-month periods ended July 31, 1997. The net assets of the GTD were sold to STS at the close of business on December 31, 1997, and as such are not presented at June 30, 1998. The net assets of the GTD are included in the consolidated balance sheet as of October 31, 1997 under "Net Assets Held For Sale." The agreement between the Company and STS, 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 STS. 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 will have 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. Subsequent to the finalization of the note, the Company and STS executed an agreement, whereby the Company will provide a discount of eight percent (8%), if the note is prepaid in full by September 30, 1998. In addition, the Company will receive a $400,000 contingent payment provided STS is in receipt of a certain order from one of its customers. The amount will be payable $100,000 per fiscal quarter beginning three months after STS receives such order. The Company will also receive a warrant from STS exercisable for that number of shares of the voting common stock of STS which equals 5% of the issued and outstanding shares of common stock and common stock equivalents immediately following and giving effect to any initial underwritten public offering by STS. In the event that STS is sold, merged or liquidated prior to any such initial underwritten public offering, the Company will receive 15% of the gross proceeds of such transaction that are in excess of $7 million, and the warrant described above will be cancelled. The Company has subleased to STS approximately 30,000 square feet 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 the first three years and $264,000 for each of the last two years of the sublease. F. SUBSEQUENT EVENTS On July 29, 1998, the Board of Directors approved, subject to shareholder approval and definitive documentation, two actions related to the outstanding Series A Convertible Preferred Stock and the 9.01% Convertible Term Debentures. The first action is a restructuring of the Series A Convertible Preferred Shares to (i) eliminate the variable conversion rate and reduce the conversion price from $16.25 to $4.00 per share, (ii) eliminate the limit on the maximum amount of common shares issuable on conversion and, accordingly, eliminate the 8% senior subordinated note provision and (iii) eliminate the dividend payments provision required when the stock price is below $8.00 per share. In return, Series A preferred shareholders will receive new warrants for 700,000 shares of Class A Common Stock with a market-based exercise price of $3.00 per share. In addition, existing warrants for 760,000 shares will be re-priced from $16.25 to a market-based exercise price of $3.00 per share. The Company would have the right to demand exercise of these warrants when the stock price average is above $4.00 per share for twenty (20) consecutive trading days or more. The second action is the conversion of $10,000,000 of 9.01% Convertible Term Debentures into Class A Common Stock at a rate of $4.00 per share in lieu of the current conversion price of $12.50 per share. In addition, the company will have the right to pay the August 31, 1998 semi-annual interest payment in Class A Common Stock. It is currently estimated that the above two actions would result in a non-cash expense of approximately $750,000, if and when the above two actions become finalized. During July and August 1998, certain holders of the Company's Convertible Term Debentures converted their holdings into Class A Common Stock. $1.2 million of Convertible Term Debentures were converted into 399,790 shares of Class A Common Stock, as of August 12, 1998. Also during July 1998, certain holders of the Company's Series A Convertible Preferred Shares converted their holdings into Class A Common Stock. $1.2 million of Series A Convertible Preferred Shares were converted into 210,524 shares of Class A Common Stock, as of August 12, 1998. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL During 1997 the Company operated a Medical Technology Division (the "MTD"), and a Government Technology Division (the "GTD"). On December 31, 1997, following approval by shareholders, the Company sold the GTD (the "GTD Sale") to Strategic Technology Systems, Inc. ("STS"). On January 29, 1998, the Company elected to change its fiscal year so that the annual accounting period will henceforth be from January 1 through December 31. This Quarterly Report on Form 10-Q, for the three and six-month periods ended June 30, 1998, does not include, except as indicated herein, the operations of the GTD. STS was a newly formed corporation managed and partially owned by individuals who were, prior to the GTD Sale, members of the Company's senior management (the "Management Group"). Members of the Management Group were significantly involved in the business and development of the GTD while employed by the Company and left the Company's employ to join STS concurrently with the GTD Sale. STS acquired substantially all of the operating assets of the GTD in exchange for certain consideration and the assumption of certain liabilities, pursuant to the terms and conditions set forth in an Asset Purchase Agreement between the Company and STS dated October 27, 1997 (the "Asset Purchase Agreement"). The Asset Purchase Agreement was filed as an exhibit to the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on November 11, 1997. The consolidated financial statements of the Company have been restated in order to account for the operations of the GTD as discontinued operations in view of the GTD Sale. In the restatement, all items of income and expense attributable to GTD's operations for all periods presented have been eliminated from consolidation and accounted for on a net basis as discontinued operations. All assets and liabilities of the GTD were sold to STS at the close of business on December 31, 1997, and as such are not presented at June 30, 1998. Accordingly, the following discussion of the Company's financial condition and the results of operations excludes the results of the discontinued operations, except as otherwise indicated. In February 1998, the Company purchased certain assets from Consilium, Inc. Refer to Note C in the Notes to Consolidated Financial Statements and the "Continuing Operations Overview" below for more information about this acquisition. The Company's premier product was PHARMASYST, which was introduced in 1993. Based upon the technology used in PHARMASYST, the Company developed the Base10(TM)ME product line, formerly known as the PHARM2(TM) product line. The Company revised its product line name in conjunction with the release of Base10(TM)ME version 2.3 in June 1998. COST REDUCTION MEASURES During the latter part of the second quarter of 1998, the Company initiated cost reduction measures, coinciding with the completion of certain development work on version 2.3 of Base10(TM)ME. Costs were primarily reduced by downsizing the Company's workforce by approximately 20%. The Company incurred severance costs of approximately $200,000 related to the downsizing. These costs are reflected in the second quarter results. The effects of the downsizing, and other expense reductions are anticipated to be reflected in the third and fourth quarter 1998 results of operations.* CONTINUING OPERATIONS OVERVIEW Since 1991 the Company has been engaged in the development of products for the regulated manufacturing industry and, most recently, computerized Manufacturing Execution Systems ("MES") for the pharmaceutical and medical device industries. The Company believes the demand for MES in these markets is poised for significant growth over the next several years for a number of reasons.* First, there is growing pressure upon the Company's customer base for compliance with regulations promulgated by the FDA, the International Standards Organization (ISO 9000), and other industry standards such as Good Automated Manufacturing Practices ("GAMP"). Second, there are increasing competitive influences brought on by the business combinations occurring in the customer market and the purchasing power for customer products among HMOs and other benefit programs. The Company believes that the Base10(TM)ME product is a premier, standardized PC-based system running on Microsoft Windows-NT with requisite functionality and documented support required by the pharmaceutical and medical device industries to assist in reducing costs while remaining FDA, ISO 9000, and GAMP compliant. The Company believes that the acquisition of certain assets from Consilium, Inc. in February 1998 further broadens the Company's reach into these industries with the addition of the FlowStream product ("Base10(TM)FS"), a UNIX-based MES targeted at pharmaceutical, medical device and specialty chemical customers. The Company will continue to pursue a leadership position in this market, and intends to explore other potential opportunities for growth in other regulated areas such as food, cosmetics, and chemical industries through ongoing investment in these MES products.* The Company has received indications from customers and prospects that compliance with industry standards is an imperative to sales. As such, efforts have been focused on compliance with certain industry standards and the Company believes that both Base10(TM)ME and Base10(TM)FS are compliant with FDA, ISO 9000, and GAMP.* As described above, there is a need for pharmaceutical and medical device manufacturers to have MES products compliant with current Good Manufacturing Practices (cGMP) as established by the FDA. Further, the Company considers the additional costs of compliance with ISO 9000 and GAMP to be prudent investments.* The installation of MES is a complex process involving integration of existing hardware platform and systems. A significant factor in successful field installation is the ability of the customer personnel to understand the system and, in addition to participating in the required training, to accommodate the difference between standard paper systems and electronic methodology. In addition, the system must undergo rigorous testing after installation and may require an extended period of modifications to fully comply with customer requirements, some of which may be at the Company's expense.* For use in a manufacturing environment, the system generally has to undergo validation in accordance with defined procedures determining its fitness for use in a regulated environment. The Company currently has two PHARMASYST systems installed and validated, one at a medical device manufacturing plant and the other at a pharmaceutical manufacturing plant. There are 14 validated Base10(TM)FS installations at various customer sites. One additional PHARMASYST product and one Base10(TM)ME product are believed to have completed customer testing necessary for validation but have not been formally declared validated by the customer. In order to address the needs of the dynamic environment of the Company's customers, the Company must look to continually enhance compliance to industry standards. The Company believes that revenue recognition can be accelerated by incorporating greater functionality in both Base10(TM)ME and Base10(TM)FS, thereby reducing the amount of customization at each customer installation. This reduction in customization could result in shortened time between order placement and subsequent revenue recognition.* Personnel are already in place to address product development and enhancement, sales and marketing, and customer support. Management believes absorbing these expenses in advance of revenue generation is essential to facilitating market emergence and near term growth of the Company.* Contracts to deliver software, which require significant customization or modification for an extended period of time, are accounted for under the percentage of completion method. For products or orders, which are more standardized in nature, revenue is recognized on delivery. In 1996, the Company determined that its Base10(TM)ME product had become standardized and, generally, Base10(TM)ME license fees are recognized as revenue upon delivery of standard Base10(TM)ME; revenue for customization is recognized on a percent completion basis; and revenue from other services is recognized as rendered. The Company also determined that Base10(TM)FS was standardized when acquired and would be accounted for in a consistent manner with Base10(TM)ME. Software development expenditures are expensed as research and development until a product attains technological feasibility. Thereafter, expenditures are capitalized until products attain commercial viability. The Company established technological feasibility for PHARMASYST(R) in 1993. At June 30, 1998 PHARMASYST(R) and its successor Base10(TM)ME had a capitalized value of $3.1 million after allowing for amortization. Development expenditures for PHARMASYST(R) and Base10(TM)ME and other commercial products have consisted primarily of salaries of software engineers and quality assurance staff plus applicable allocated overhead. The amortization period for PHARMASYST(R) and Base10(TM)ME is scheduled to be completed by June 1999 and until then will have a significant effect on earnings. THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THREE MONTHS ENDED JULY 31, 1997. CONTINUING OPERATIONS REVENUES Company revenues were $2.1 million in the period ended June 30, 1998 as compared to $0.9 million in the three months ended July 31, 1997. Of the $1.2 million increase in revenue, approximately $0.1 million or 5% was related to software licenses, maintenance and installations, $0.9 million or 82% related to solution services and $0.2 million or 13% related to product enhancements. Revenues for the three months ended June 30, 1998 were derived 46% from software licenses, maintenance and installations, 47% from solutions services and 7% from product enhancements, compared to revenues for the three months ended July 31, 1997 which were primarily derived from software licenses and installations. Late in the second quarter of 1998, the company began delivering the latest version of Base10(TM) manufacturing execution system (MES) software. COST OF SALES Cost of sales during the period ended June 30, 1998 increased significantly to $2.7 million from $1.2 million in the quarter ended July 31, 1997, primarily due to salary and labor-related expenses for software development being largely expensed as incurred in the quarter ended June 30, 1998, as opposed to the quarter ended July 31, 1997 when salaries were primarily capitalized. In the 1998 period, salary and labor-related expenses in cost of sales were approximately $2.3 million. The increase in costs during the 1998 period resulted largely from increased costs incurred in completing the development of version 2.3 of Base10(TM) ME, the integration costs related to the addition of the FlowStream product line, as well as the severance payments related to the second quarter downsizing (See Management's Discussion and Analysis of Financial Condition and Results of Operations - Cost Reduction Measures). AMORTIZATION OF SOFTWARE DEVELOPMENT COSTS Amortization of capitalized software increased in the 1998 period to $0.9 million, as compared to $0.4 million in the 1997 period. This increase is attributable to the greater capitalization level of software costs in the second quarter of 1998 versus the quarter ended July 31, 1997, combined with the lower amount of remaining amortizable months available to spread capitalized costs over in the 1998 period, as compared to the 1997 period. RESEARCH AND DEVELOPMENT COSTS Research and development costs increased to $194,000 in the 1998 period as compared to $45,000 in the 1997 period. The increase is related to additional salaries and related expenses in the 1998 period. Research and development costs are incurred to develop future additions to the Company's current product family. SALES AND MARKETING EXPENSES Company sales and marketing expenses increased significantly in the 1998 period to $1.0 million, from $0.6 million in the quarter ended July 31, 1997. This rise was mainly due to increases in salary and related expenses resulting from the hiring of additional personnel. GENERAL AND ADMINISTRATIVE EXPENSES Company general and administrative expenses increased significantly in the 1998 period to $1.9 million, from $0.5 million in the comparable 1997 period. This rise was mainly due to increases in consulting and professional fees and administrative salary and related expenses. The severance payments and related costs associated with the second quarter downsizing also contributed to the rise in general and administrative expenses. Also, a portion of the general and administrative expenses in the comparable period in 1997 were allocated to the discontinued government division, and, therefore, are included in discontinued operations for the 1997 period. OTHER EXPENSE Other expense decreased from $0.4 million in the 1997 period to $0.2 million in the 1998 period. Other expense in 1998 is primarily comprised of interest expense of $0.4 million, offset by $0.2 million of interest income. In the 1997 period, other expense is mainly comprised of interest expense. Interest expense increased slightly in the 1998 period as a result of a slightly higher level of debt; interest income increased in the 1998 period as a result of higher cash balances available to earn interest. CONTINUING LOSSES The Company incurred a net loss of $4.9 million in the quarter ended June 30, 1998, compared to a $2.3 million net loss from continuing operations for the quarter ended July 31, 1997. The increased loss was primarily due to increases in cost of sales of $1.5 million, software amortization of $0.5 million, research and development of $0.2 million, sales and marketing expenses of $0.4 million, and increased general and administrative expenses of $1.4 million. These increases were partly offset by the revenue increase of $1.2 million and the decrease of $0.2 million in other expenses. During the second quarter of 1998, the Company did not realize the full financial benefit of the second quarter downsizing and, as a result, anticipates a reduction in salary related expenses in the third and fourth quarters of 1998. The Company expects additional losses for the balance of 1998, including amortization expense currently estimated to be $3.5 million for the 1998 year.* 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 and Base10(TM)FS, timely delivery and successful installation and validation of its systems by its customers, and successful competition in the markets in which the Company participates. * SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JULY 31, 1997. CONTINUING OPERATIONS REVENUES Company revenues were $3.0 million in the six-month period ended June 30, 1998 as compared to $1.4 million in the comparable period ended July 31, 1997. Of the $1.6 million increase in revenue, $1.4 million or 88% was related to solutions services and $0.5 million or 31% related to product enhancements. The increase was offset by a decrease of $0.3 million or 19% in revenue related to software licenses, maintenance and installations. Revenues for the six months ended June 30, 1998 were derived 36% from software licenses, maintenance and installations, 47% from solutions services and 17% from product enhancements, compared to revenues which were primarily derived from software licenses and installations in the six-month period ended July 31, 1997. COST OF SALES Cost of sales during the period ended June 30, 1998 increased significantly to $4.3 million from $1.7 million in the six months ended July 31, 1997, primarily due to salary and labor-related expenses for software development being largely expensed as incurred in the six months ended June 30, 1998 as opposed to the period ended July 31, 1997, when salaries were primarily capitalized. In the 1998 period, salary and related expenses in cost of sales were approximately $3.5 million. The increase in costs during the 1998 period resulted largely from increased costs incurred in completing the development of version 2.3 of Base10(TM) ME, the integration costs related to the addition of the FlowStream product line, as well as the severance payments related to the second quarter downsizing (See Management's Discussion and Analysis of Financial Condition and Results of Operations - Cost Reduction Measures). AMORTIZATION OF SOFTWARE DEVELOPMENT COSTS Amortization of capitalized software increased in the 1998 period to $1.8 million, as compared to $0.8 million in the 1997 period. This increase is attributable to the greater capitalization level of software costs in the six months ended June 30, 1998 versus the comparable period ended July 31, 1997, combined with the lower amount of remaining amortizable months available to spread capitalized cost over in the 1998 period, as compared to the 1997 period. RESEARCH AND DEVELOPMENT COSTS Research and development costs increased to $334,000 in the 1998 period as compared to $84,000 in the 1997 period. This increase is related to additional salaries and related expenses in the 1998 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 significantly increased in the 1998 period to $2.2 million, from $1.3 million in the six months ended July 31, 1997. The rise was mainly attributable to increases in salary and related expenses resulting from the hiring of additional personnel. GENERAL AND ADMINISTRATIVE EXPENSES Company general and administrative expenses increased significantly in the 1998 period to $3.1 million, from $1.0 million in the comparable period in 1997. The increase was primarily due to increases in consulting and professional fees and administrative salary and related expenses. The severance payments and related costs associated with the second quarter downsizing also contributed to the rise in general and administrative expenses. Also, a portion of the general and administrative expenses in the comparable period in 1997 were allocated to the discontinued government division, and, therefore, are included in discontinued operations for the 1997 period. OTHER EXPENSES Other expenses decreased from $0.7 million in the 1997 period to $0.4 million in the 1998 period. In 1998, other expense is primarily comprised of interest expense of $0.9 million, offset by $0.4 million of interest income and $0.1 million of other income. In the 1997 period, other expense was mainly comprised of interest expense. Interest expense increased slightly in the 1998 period as a result of a higher level of debt; interest income increased in the 1998 period as a result of higher cash balances available to earn interest. CONTINUING LOSSES The Company incurred a net loss of $9.3 million in the six months ended June 30, 1998, compared to a $4.2 million net loss from continuing operations for the period ended July 31, 1997. The increased loss was primarily due to increases in cost of sales of $2.6 million, software amortization of $1.0 million, research and development of $0.3 million, sales and marketing expenses of $0.9 million, and increased general and administrative expenses of $2.1 million. These increased expenses were partly offset by the revenue increase of $1.6 million and the decrease of $0.3 million in other expenses. During the second quarter of 1998, the Company did not realize the full financial benefit of the second quarter downsizing and, as a result, anticipates a reduction in salary related expenses in the third and fourth quarters of 1998.* 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 and Base10(TM)FS, timely delivery and successful installation and validation of its systems by its customers, and successful competition in markets in which the Company participates.* READINESS FOR THE YEAR 2000 The Company has taken actions to understand the nature and extent of the work required to make its systems and infrastructure Year 2000 compliant. The Company currently does not believe that it has any material Year 2000 problem with its products and believes, based on available information, that it will be able to manage its total Year 2000 transition without any material adverse effect on business operations or financial prospects. While no assurances can be given, the Company anticipates converting all of its present infrastructure software systems to currently available software products which are already Year 2000 compliant. The Company cannot anticipate the impact of suppliers and vendors non-compliance with the Year 2000.* LIQUIDITY AND CAPITAL RESOURCES On December 31, 1997 the Company received a cash payment of $3,500,000 from STS, related to the sale of the GTD net assets to STS. Refer to Note E of the Notes to Consolidated Financial Statements for more information regarding the sale of assets of the GTD to STS. Also, in December 1997, the Company sold an aggregate of $19 million of convertible preferred stock ("Preferred Stock") and Class A Common Stock Purchase Warrants (the "Warrants"). In December 1997, the Company received cash of $8.0 million related to the first installment of the $19 million sale of Preferred Stock and Warrants. The $8.0 million cash received was net of financing fees of $1.0 million and legal fees of $0.4 million, both of which covered fees for the first and second installments of the $19 million sale. The second installment of $9.6 million was received as cash in January 1998. Refer to Note D and Item 2 of Part II for more information regarding the terms of the Preferred Stock. The Company had $4.7 million of cash at June 30, 1998, and while the Company has initiated cost reduction measures, as discussed in Management Discussion and Analysis of Financial Condition and Results of Operations, it may undertake further cost reduction activities to ensure that cash generated by operations and existing capital resources are sufficient to fund its operations through the end of 1998. The Company is relying on its leading products, Base10(TM)ME and Base10(TM)FS to stimulate new orders. The Company is also depending upon successful collection of accounts receivable within payment terms. 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 1999, the Company may elect to seek additional sources of capital and may also elect to reduce the pace of its development of its products 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.* *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. 333-46095) as well as current and previous filings with the Securities and Exchange Commission. In assessing forward looking statements contained herein, readers are urged to read carefully those statements and other filings with the Securities and Exchange Commission. The Company does not undertake to publicly update or revise its forward looking statements even if experience or future changes make it clear that any projected results or events (expressed or implied) will not be realized. PART II. OTHER INFORMATION ITEM 2: CHANGES IN SECURITIES SALE AND ISSUANCE OF $19 MILLION CONVERTIBLE PREFERRED STOCK AND WARRANTS During December 1997 the Company executed the Series A Convertible Preferred Shares Agreement, in which it sold and issued $19 million of convertible preferred stock ("Preferred Stock") and Class A Stock purchase warrants (the "Warrants"). Initially the Company sold and issued $9.375 million of Preferred Stock and Warrants as of December 5, 1997, to several institutional investors. On December 31, 1997, after obtaining shareholder approval, the Company sold and issued a second installment of $9.625 million of Preferred Stock and Warrants to complete the $19 million sale and issuance. The second installment of $9.625 million was received as cash in January 1998. The Preferred Stock has a term of three years and pays a cumulative dividend of 8.0% per annum during any quarter in which the closing bid price for the Class A Stock is less than $8.00 for any ten consecutive trading days. An equivalent payment is payable to any holder of Preferred Stock which is subject during any quarter to a standstill period following a Company underwritten public offering or which is non-convertible because of the limitations described below. Such dividends and payments are payable only prior to conversion and payable in cash or additional Preferred Stock at Base Ten's option; however, if the Company elects to pay the dividend in Preferred Stock, the amount of such payment will be 125% of the cash amount. The Preferred Stock has a liquidation preference as to its principal amount and any accrued and unpaid dividends. The Preferred Stock is convertible at any time or from time to time into Class A Stock, at a conversion price equal to the lesser of (i) $16.25 per share or (ii) the Weighted Average Price (as defined) of the Class A Stock prior to the conversion date. In any event, no more than 3,040,000 shares of Class A Stock may be issued upon conversion of all of the Preferred Stock. Any Preferred Stock remaining outstanding because of this limitation may be redeemed at the holder's option for a subordinated 8% promissory note maturing when the Preferred would have matured. The Company has the right, at any time, to redeem all or any part of the outstanding Preferred Stock or subordinated notes at 130% of their original purchase price, subject to certain limitations. Any shares of Preferred Stock or subordinated notes still outstanding three years after issuance must be redeemed in either cash, or at the Company's option, in Class A Stock. If the Company elects to make the redemption in Class A Stock, the amount of such payment will be 125% of the original purchase price. The holders of the Preferred Stock have the same voting rights as the holders of Class A Stock, calculated as if all outstanding shares of Preferred Stock had been converted into shares of Class A Stock on the record date for determination of shareholders entitled to vote on the matter presented. For each $1 million of Preferred Stock purchased, purchasers received five-year warrants to purchase 40,000 shares of Class A Stock exercisable at $16.25 per share. If exercised these would represent an additional 760,000 shares of Class A Stock, or up to an aggregate of 3,800,000 shares of Class A Stock resulting from this sale (subject to adjustment in certain circumstances), assuming conversion of all Preferred Stock and exercise of all warrants. A registration statement ("Registration Statement") filed with the Securities and Exchange Commission ("SEC") registering for resale the Class A Stock underlying the Preferred Stock, including any Preferred Stock which may be issued as a dividend, and the Warrants, was declared effective by the SEC on February 19, 1998. The holders have agreed, if requested by a managing underwriter, to a maximum 90-day standstill period following any underwritten Company public offering, but not in excess of two such standstills (or more than 90 days) in any 18-month period. In the event a standstill period is effective, the maturity date of the Preferred Stock would be extended by the duration of the standstill period. See discussion under "Footnote F - Subsequent Events" regarding the proposed restructuring of the above referenced Series A Convertible Preferred Shares. CONVERSION OF CONVERTIBLE TERM DEBENTURES TO CLASS A COMMON STOCK During April and May 1998, $3,500,000 of Convertible Term Debentures were converted to 757,154 shares of Class A Common Stock. At June 30, 1998, after the effect of this conversion, the Company had $11,700,000 of Convertible Term Debentures on its balance sheet. In July and August 1998, an additional $1,200,000 of Convertible Term Debentures were converted to 399,790 shares of Class A Common Stock. CONVERSION OF CONVERTIBLE PREFERRED STOCK TO CLASS A COMMON STOCK During May 1998, 125 shares of Convertible Preferred Stock were converted to 24,944 shares of Class A Common Stock. In July 1998, an additional 1,174 shares of Convertible Preferred Stock were converted to 210,524 shares of Class A Common Stock. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On April 16, 1998, the Company held its Annual Shareholders' Meeting. At the meeting, the following were approved by the shareholders: (1) the election of Messrs. Alan S. Poole, William Sword, Thomas E. Gardner and David C. Batten to the Board of Directors, (2) the amendment of the Certificate of Incorporation to modify certain terms of the Class A Common Stock and the Class B Common Stock (see below), and to increase the authorized Class A Common Stock from 22 million shares to 40 million shares, (3) the adoption of three equity plans, and (4) the issuance and grant of certain options and warrants. A certificate of amendment reflecting item (2) above was filed with the New Jersey Secretary of State and is now effective. Also, on July 24, 1998 the Company filed three Registration Statements on Form S-8 with the Securities and Exchange Commission to register the equity plans referred to in item (3) above. The modifications to the terms of the Class A and Class B Common Stock increased the exchange ratio for conversion of Class B Common Stock into Class A Common Stock from 1:1 to 1:1.5; changed the voting rights of the Class A Common Stock and the Class B Common Stock with respect to the election of directors so that the directors of the Company will be elected by holders of Class A Common Stock and Class B Common Stock voting together as a single class; made the voting rights of both classes the same so that they have the same voting power; eliminated a separate class vote of Class B Common Stock holders on certain corporate transactions; and changed the dividend restriction so that Class A Common Stock and Class B Common Stock receive the same dividends. In December 1997, the National Association of Securities Dealers, Inc. (the "NASD"), notified the Company that it proposed to de-list the Class B Common Stock from the Nasdaq SmallCap Market because the number of holders of Class B Common Stock appeared to have fallen below 300 beneficial owners. The Company proposed the amendments to alleviate certain of the negative impact of such de-listing of the Class B Common Stock, and the NASD granted to the Company a temporary exception, until May 1, 1998, in order to permit the Company to effect these amendments. Following the close of business on May 1, 1998, the Class B Common Stock was no longer listed on the Nasdaq SmallCap Market. The Class A Common Stock continues to be listed on the Nasdaq National Market. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - (27) Financial Data Schedule (Edgar filing only.) (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K dated April 16, 1998, filed April 23, 1998, reporting that at the Company's Annual Shareholders' Meeting of April 16, 1998, the shareholders of the Company approved the amendment of the Certificate of Incorporation to modify certain terms of the Class A Common Stock and the Class B Common Stock. The modifications to the terms of the Class A and Class B Common Stock increased the exchange ratio for conversion of Class B Common Stock into Class A Common Stock from 1:1 to 1:1.5; changed the voting rights of the Class A Common Stock and the Class B Common Stock with respect to the election of directors so that the directors of the Company will be elected by holders of Class A Common Stock and Class B Common Stock voting together as a single class; made the voting rights of both classes the same so that they have the same voting power; eliminated a separate class vote of Class B Common Stock holders on certain corporate transactions; and changed the dividend restriction so that Class A Common Stock and Class B Common Stock receive the same dividends. The Company filed a Current Report on Form 8-K/A - Amendment No. 1 dated February 19, 1998, filed May 5, 1998, reporting that the Company amended Item 7 of its previously filed Report on Form 8-K. This amendment stated that the financial statements required by Item 7(a) of the Form 8-K are not included in this Report because they were not currently available to the Company. If upon further examination the Company determined that the assets purchased by the Company require a change in the classification of the transaction previously reported as an "Item 2" event to the classification of the transaction as an "Item 5" event, the Company would proceed to amend this Report accordingly. Pro-forma financial statements required under Item 7(b) of the Form 8-K were included in the Report. The Company filed a Current Report on Form 8-K/A - Amendment No. 2 dated February 19, 1998, filed May 11, 1998, reporting that the Company amended the classification of the transaction previously reported as an "Item 2" event to the classification of the transaction as an "Item 5" event. Upon further examination of the transaction, the Company determined that the assets purchased by the Company did not involve a "business," as that term is defined in Rule 11-01 (d) of Regulation S-X. 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, 1998 BASE TEN SYSTEMS, INC. (Registrant) By: THOMAS E. GARDNER ------------------------------------------ Thomas E. Gardner Chairman of the Board, 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) EX-27 2 FDS --
5 (Replace this text with the legend) 0000010242 Base Ten 1 U.S. DOLLARS 3-MOS DEC-31-1998 APR-01-1998 JUN-30-1998 1 4,704,000 125,000 3,356,000 (140,000) 286,000 8,780,000 9,221,000 (3,704,000) 24,124,000 4,416,000 11,700,000 19,000 0 9,559,000 (5,186,000) 24,124,000 2,052,000 2,052,000 2,716,000 6,746,000 (204,000) 0 408,000 (4,898,000) 0 (4,898,000) 0 0 0 (4,898,000) (0.59) (0.59)
-----END PRIVACY-ENHANCED MESSAGE-----