10-Q 1 tenq.txt TENQ.TXT ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended September 30, 2001 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.) 535 E. County Line, Suite 16 Lakewood, N.J. 08701 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (732) 370-6895 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 5, 2001 Class A Common Stock, $5.00 par value 5,338,812 Class B Common Stock, $5.00 par value 12,667 ================================================================================ Base Ten Systems, Inc. And Subsidiaries Index

Base Ten Systems, Inc. and Subsidiaries Consolidated Balance Sheet (Unaudited) ($ in thousands, except par value)

See Notes to the Consolidated Financial Statements 1 Base Ten Systems, Inc. and Subsidiaries Consolidated Statements of Operations (Unaudited) ($ in thousands, except per share data)

See Notes to the Consolidated Financial Statements 2 Base Ten Systems, Inc. and Subsidiaries Consolidated Statement of Common Stock and Other Shareholders' Equity (Unaudited) ($ in thousands)

See Notes to the Consolidated Financial Statements 3 Base Ten Systems, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) ($ in thousands)

4 Base Ten Systems, Inc. and Subsidiaries Notes to Consolidated Financial Statements Nine Months Ended September 30, 2001 (Unaudited) A. Basis of Presentation and Liquidity The financial statements of Base Ten Systems, Inc. and Subsidiaries (the "Company" or "Base Ten") have been prepared on the basis that its current operations are limited to administrative matters pending implementation of its strategy for redirection of its business within the electronics or other technology sectors. The Company has incurred significant operating losses and negative cash flows in recent years. In October 2000, Base Ten sold part of its software business and announced its decision to dispose of its remaining software operations, with a view to pursuing alternative revenue generating or strategic opportunities. See Note G below. The assets and liabilities associated with the Company's software operations have been adjusted to reflect their net realizable value upon disposition. 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-KSB for the year ended December 31, 2000. The results of operations for the nine months ended September 30, 2001 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 Company's financial position and operating results are reflected in the accompanying statements. Certain reclassifications reflecting discontinued operations have been made to prior period financial statements to conform to the current period presentation. B. Description of Business Base Ten was founded in 1966 and became publicly traded in 1968. Historically, the Company focused on designing and producing safety critical products for defense and space programs. In response to declines in defense spending during the early 1990s, Base Ten sought to apply its know how in safety critical technology to develop commercial lines of business. The Company ultimately established separate divisions for its government technology ("GTD") and medical technology ("MTD") operations to address distinct challenges in those sectors. The GTD was sold to Strategic Technology Systems, Inc. in 1997. In October 2000, the Company sold its manufacturing execution software ("MES") business to ABB Automation, Inc. ("ABB") for $2.0 million and announced its intention to dispose of its clinical software ("Clinical Software") business. In March 2001, Base Ten entered into an agreement for the sale of the Clinical Software business to Almedica Advanced Technology LLC ("AAT"), a subsidiary of Almedica International, Inc. ("Almedica"). See Notes D and G below. The Company owns a minority interest in uPACs LLC ("uPACs"), which developed an ultrasound archiving communications system to digitize, record and store images on CD-ROM media as an alternative to film and video storage. Efforts to commercialize uPACs ceased in the first quarter of 2000, and the accompanying financial statements reflect no value for the investment. C. Summary of Significant Accounting Policies Risks and Uncertainties - The Company has operated for several years in the software industry, which is highly competitive and rapidly changing. The Company incurred significant losses from these operations and has determined to redirect its business to pursue alternative revenue generating or strategic opportunities in the electronics or other technology sectors. The redirected business will be subject to all of the risks inherent in a technology business, including the potential for significant technological changes in the industry or in customer requirements, claims by current and former customers for contractual or other unfulfilled commitments, ability to attract and retain qualified employees, limited financial, technical and managerial resources, protection of intellectual property rights and potentially long sales and implementation cycles. 5 Reliance on Estimates - 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 value of its investments in Clinical Software assets and uPACs, reserves for claims by customers and vendors for contractual or other unfulfilled commitments, deferred tax asset valuation reserves and the value of assets and liabilities to be disposed of, all of which could differ from actual values. D. Acquisitions Almedica Technology Group Acquisition and Disposition - In June 1999, the Company acquired all of the outstanding stock of Almedica Technology Group Inc., a wholly-owned subsidiary of Almedica engaged in developing and distributing clinical studies software for the pharmaceutical industry. The stock of the subsidiary was acquired in exchange for 3,950,000 shares of the Company's Class A common stock (790,000 shares after adjustment for a reverse stock split in September 1999). At the time of the purchase, the Class A common stock traded for $0.90625 per share ($4.53125 after adjustment for the reverse stock split). The acquisition was accounted for under the purchase method of accounting. The purchase price was allocated to the assets acquired from Almedica (the "Clinical Assets") based on their estimated fair values. Management estimated the value of certain intangible assets to be $4.1 million as of the purchase date. In October 2000, Base Ten announced its decision to dispose of its Clinical Software business, including the Clinical Assets. In March 2001, the Company entered into an agreement with Almedica and AAT to contribute the Clinical Software assets to AAT in exchange for $75,000 and a 20% ownership interest in AAT. The Clinical Software assets are reflected in the accompanying financial statements at their estimated net realizable value of $75,000, with no value attributed to the interest in ATT to be received by Base Ten in the transaction. The sale of the Clinical Software assets is subject to various conditions, including approval by the Company's shareholders. E. Redeemable Convertible Preferred Stock In July 2000, the holders of the Company's Series B preferred stock converted 5,000 of their shares into 250,000 shares of Class A common stock. The Company also repurchased their remaining shares of Series B preferred stock and 269,560 Class A common stock purchase warrants for approximately $1.1 million. As a result of these transactions, the Series B preferred stock was eliminated, the Shareholders' Equity section of the Company's balance sheet increased by approximately $17.9 million and a gain of $11.7 million was recorded on the repurchase of the Series B preferred stock during July 2000. F. Net Income (Loss) Per Share The Company calculates earnings (loss) per share in accordance with the provisions of Statement of Financial Accounting Standard No. 128, "Earnings Per Share" ("FAS 128"). FAS 128 requires the Company to present Basic Earnings Per Share, which excludes dilution, and Diluted Earnings Per Share, which includes potential dilution. The following table sets forth a reconciliation of the numerators and denominators used to calculate income (loss) per share in the accompanying Consolidated Statements of Operations. 6 (dollars in thousands, except per share data)

Stock options, warrants and rights would have an anti-dilutive effect on earnings per share for the periods ended September 30, 2001 and 2000 and, therefore, were not included in the calculation of diluted earnings per share. G. Discontinued Operations Sale of MES Software to ABB In October 2000, the Company sold its MES business to ABB for $2.0 million. Assets transferred to ABB as part of the transaction included patents, copyrights, trademarks and tradenames, data, contracts, accounts receivable, equipment and software deployed in the Company's MES business. Sale of Base Ten Systems NV to Kris Adriaenssens Effective November 1, 2000, the Company transferred 100% of the shares of Base Ten Systems NV, its Belgian subsidiary, to Kris Adriaenssens, a consultant to Base Ten, in exchange for consulting services. At the time of the transaction, the subsidiary had no operations or employees. The assets of the subsidiary at the sale date consisted primarily of office equipment and automobiles, and its liabilities included obligations under leases of office space, equipment and automobiles. Sale of Clinical Software to Almedica Advanced Technology LLC In March 2001, Base Ten entered into an agreement to sell its Clinical Software business to AAT, subject to shareholder approval. See Note D above. The following table presents the results of operations for the Company's discontinued product lines for the three months and nine months ended September 30, 2001 and 2000: 7

H. Income Taxes The Company has net operating loss carryforwards for federal income tax purposes of approximately $78 million, expiring in the years 2005 through 2020. A 100% valuation allowance has been provided against this deferred tax asset. There is no provision for deferred or current income taxes for the nine months ended September 30, 2001 and 2000. I. Contingencies During first quarter of 2001, the Company recorded a good faith deposit of $100,000 as Other Current Assets. This amount was paid into escrow in conjunction with the Company's discussions to purchase certain operating assets from Genesis Manufacturing, Inc. ("Genesis"). Base Ten withdrew from the discussions in February 2001. In addition, the Company recorded accrued expenses of $25,000 representing the estimated costs associated with litigation related to Genesis. The deposit was returned to the Company during the third quarter of 2001 and was recorded as cash at that time. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Base Ten was engaged for its first quarter century in development and manufacturing of safety critical software components for defense and aerospace markets. In response to declines in defense spending during the early 1990s, the Company sought ways to apply its safety critical know how to commercial applications for healthcare and other regulated industries. The Company ultimately established divisions for its government technology ("GTD") and medical technology ("MTD") operations to address distinct challenges in those sectors. MTD operations were initially focused on development of pharmaceutical manufacturing execution systems ("MES") designed to address increasing cost containment and compliance pressures in that sector. Base Ten later identified the clinical trials market as an additional opportunity to apply its core technology, ultimately developing clinical trials management software ("Clinical Software") designed to support supplies management and compliance with traceability requirements. In 1997, the Company opted to concentrate on its MTD products both though internal development and acquisitions. At the end of that year, as part of this strategy, Base Ten completed the sale of its GTD assets and a related management restructuring. During the last three years, substantial resources were marshaled in MTD operations to refine, expand and deploy the Company's commercial software offerings. Despite the perceived potential for its MES offerings, Base Ten encountered unanticipated difficulties integrating its MES software with the wide variety of legacy computer systems deployed in pharmaceutical manufacturing facilities. Its inability to overcome these obstacles by standardizing its MES products and providing migration paths resulted in project termination by a major customer during the first quarter of 2000. Although Base Ten reallocated resources to other projects requiring less substantial customization, it continued to encounter problems in MES integration with customer legacy systems. As a result, Base Ten sold its MES assets for $2 million in October 2000. As part of the transaction, the purchaser agreed to employ members of the MES staff and assume the Company's unsatisfied commitments under MES related license agreements. Base Ten also encountered various technological and marketing difficulties in the introduction of its Clinical Software offerings, including two software suites acquired from Almedica International, Inc. ("Almedica") in June 1999. Neither the internally developed nor acquired offerings generated adequate sales to cover associated development and marketing expenses, contributing to the Company's operating losses aggregating $48.5 million during the last three years. The Company anticipates that the Clinical Software business, if retained, would continue to operate at a loss. Redirection of Business In response to Base Ten's limited financial, technical and marketing resources available to commercialize its Clinical Software products, the Company announced its decision in October 2000 to discontinue its remaining MTD operations and pursue revenue generating or strategic opportunities in sectors requiring less capital resources, technological development and time to market uncertainties. Areas of opportunity could include emerging technology or other markets currently under-served where demand can be expected to exceed supply during the foreseeable future. Successful execution of the Company's business redirection strategy will depend not only on factors within its control, including technical competence, high quality workmanship and timely delivery at reasonable prices, but also on general economic conditions, availability of skilled technicians and other factors partially or entirely beyond its control. As part of its business redirection, Base Ten has reduced its work force through a staff reduction plan and attrition. The Company has also sold or closed its operations in Trenton and Parsippany, New Jersey, California, England and Belgium, resulting in the elimination of annual rent obligations aggregating approximately $830,000. In addition, during March 2001, Base Ten entered into an agreement with Almedica and its wholly owned limited liability company ("Almedica LLC") to contribute the Clinical Software assets to Almedica LLC in exchange for $75,000 and a 20% ownership interest in Almedica LLC. The sale of the Clinical Software assets is subject to various conditions, including approval by the Company's shareholders. 9 Results of Continuing Operations General. In view of the Company's determination in the fourth quarter of 2000 to dispose of its Clinical Software businesses and pursue other revenue generating or strategic opportunities, its consolidated financial statements included in this Report account separately for continuing operations comprised of general overhead, rent and other infrastructure costs not attributable to discontinued operations. Three Months Ended September 30, 2001 and 2000. The Company incurred losses from continuing operations aggregating $121,000 in the third quarter of 2001 and $1,057,000 in the corresponding quarter of 2000. The losses were primarily from general and administrative expenses allocable to continuing operations, which decreased to $146,000 in the third quarter of 2001 from $506,000 in the same quarter last year. The decrease resulted from reductions of $154,000 in personnel and related costs, $108,000 in office expenses and $46,000 in outside professional services. Results of continuing operations also reflect other income of $25,000 in the third quarter of 2001 versus $551,000 of other expenses in the prior period primarily from foreign exchange losses and interest on capital leases. Nine months Ended September 30, 2001 and 2000. The Company incurred losses from continuing operations aggregating $519,000 in the nine months ended September 30, 2001 and $3,166,000 in the corresponding period of 2000. The losses were primarily from general and administrative expenses allocable to continuing operations, which decreased to $633,000 in the nine months ended September 30, 2001 from $2,177,000 in the same period last year. The decrease resulted from reductions of $560,000 in personnel and related costs, $436,000 in office expenses and $368,000 in outside professional services. Results of continuing operations also reflect other income of $114,000 in the nine months ended September 30, 2001 versus $989,000 of other expenses in the prior period primarily from foreign exchange losses and interest on capital leases. Results of Discontinued Operations General. The consolidated financial statements of the Company included in this Report account for its MTD business as discontinued operations in view of the sale of its MES assets and agreement for the sale of its Clinical Software assets. Accordingly, all items of income and expense attributable to the software operations for all periods presented in the consolidated financial statements are aggregated and identified on a net basis as gain or loss from discontinued operations. Individual items of income and expense from discontinued operations are set forth in Note G to the consolidated financial statements accompanying this Report. Three Months Ended September 30, 2001 and 2000. The Company ceased all revenue generating operations at the end of 2000. Accordingly, it recognized no gain or loss from discontinued operations for the three months ended September 30, 2001. During the same quarter last year, the Company recognized a loss of $0.5 million from discontinued operations, comprised of $351,000 in costs of revenues, $202,000 in research and development costs, $460,000 in sales and marketing expenses and $285,000 of general and administrative charges. These expenses were partially offset by revenue of $566,000 and other income of $265,000. In addition, the Company recognized a loss during the quarter ended September 30, 2000 of $1.1 million from the disposition of software operations. Nine months Ended September 30, 2001 and 2000. The Company recognized no gain or loss from discontinued operations for the nine months ended September 30, 2001. During the corresponding period last year, Base Ten recognized a loss of $3.3 million from discontinued operations, comprised of $2.4 million in costs of revenues, $1.0 million in research and development costs, $1.7 million in sales and marketing expenses and $1.2 million in general and administrative charges. These expenses were partially offset by revenue of $2.3 million and other income of $623,000. Liquidity and Capital Resources General. The accompanying consolidated financial statements have been prepared on the basis that the Company's current operations will be discontinued. Base Ten has incurred significant operating losses and negative cash flows in recent years. In view of the Company's determination to dispose of its Clinical Software business and pursue revenue generating or strategic opportunities, its consolidated financial statements account for the assets and liabilities associated with its software operations based on their net realizable value upon disposition. The expected value of the Company's Clinical Software business reflect the terms of its agreement with Almedica. There can be no assurance that, in the event of liquidation, the Company would realize the recorded value for all of its assets. 10 Liquidity. The Company's working capital decreased from $1.7 million at December 31, 2000 to $1.3 million at September 30, 2001. As part of the planned redirection of its business, Base Ten entered into agreements during the first quarter of 2001 for the termination of lease obligations for offices and facilities in New Jersey and Belgium. During first quarter of 2001, the Company recorded a good faith deposit of $100,000 as Other Current Assets. This amount was paid into escrow in conjunction with the Company's discussions to purchase certain operating assets from Genesis Manufacturing, Inc. ("Genesis"). Base Ten withdrew from the discussions in February 2001 and recorded accrued expenses of $25,000 representing the estimated costs associated with litigation related to Genesis. The deposit was returned to the Company during the third quarter of 2001 and recorded as cash at that time. Capital Resources. In July 2000, holders of the 5,000 shares of the Company's Series B preferred stock converted their shares into 250,000 shares of Class A common stock. As part of the transaction, the Company purchased their remaining shares of Series B preferred stock, as well as 269,560 Class A common stock purchase warrants, for approximately $1.1 million. As a result of these transactions, the Series B preferred stock was eliminated, and the shareholders' equity section of the Company's balance sheet increased by approximately $17.9 million. In December 2000, the Company's Class A common stock was delisted from the Nasdaq SmallCap Market for failure to meet its $1.00 minimum bid requirement. In addition to reduced liquidity in the outstanding common stock and related risks to Base Ten's shareholders, the Company's ability to finance the planned redirection of its business through equity transactions could be substantially impaired. Forward Looking Statements This Report includes forward looking statements within the meaning of Section 21E of the Securities Exchange Act relating to the Company's prospects, plans and objectives. Those statements are generally prefaced by words like "believe," "plan," "expect" or "anticipate." All forward looking statements involve various degrees of risk and uncertainty. Factors that may cause actual and anticipated results to differ materially include the risks that (1) the Company's planned redirection of its business may fail to reverse its history of losses; (2) general economic or business conditions may be less favorable than expected; (3) conditions in the financial markets may prevent the Company from raising the capital needed to execute its business plan for contract manufacturing operations; and (4) other factors mentioned elsewhere in this Report may adversely affect the Company's financial performance and the market value of its common stock. Item 3: Quantitative and Qualitative Disclosures About Market Risk Not applicable. 11 Part II. Other Information Item 6: Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K: None 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 8, 2001 Base Ten Systems, Inc. (Registrant) By: Edward J. Klinsport ------------------------------------- Edward J. Klinsport President and Chief Executive Officer (Principal Executive Officer) By: Kenneth W. Riley ------------------------------------- Kenneth W. Riley Chief Financial Officer (Principal Financial Officer) 12

BASE TEN SYSTEMS INC 10-Q