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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended January 31, 1997 Commission File No. 0-7100
BASE TEN SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-1804206
(State of incorporation) (I.R.S. Employer
Identification No.)
One Electronics Drive
Trenton, N.J. 08619
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 586-7010
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. YES /x/ NO /_/
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Title of Class Outstanding at March 11, 1997
Class A Common Stock, $1.00 par value 7,365,317
Class B Common Stock, $1.00 par value 445,121
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<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Consolidated Balance Sheets -- January 31, 1997 (as Restated) (unaudited)
and October 31, 1996 (as Restated) (audited)..................................... 1
Consolidated Statements of Operations -- Three months ended
January 31, 1997 and 1996 (unaudited)............................................ 2
Consolidated Statements of Shareholders' Equity -- Three
months ended January 31, 1997 (as Restated) (unaudited)........................... 3
Consolidated Statements of Cash Flows -- Three months ended
January 31, 1997 and 1996 (unaudited)............................................ 4
Notes to Consolidated Financial Statements....................................... 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................... 10
PART II. OTHER INFORMATION
Item 2: Changes in Securities............................................... 14
Item 6: Exhibits and Reports on Form 8-K.................................... 14
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
January 31, 1997 October 31, 1996
(Unaudited) (Audited)
--------- -------
CURRENT ASSETS: (As Restated, See Note G)
-----------------------
<S> <C> <C>
Cash.................................................................. $ 5,273,000 $ 7,465,000
Accounts receivable (including unbilled receivables of
$4,493,000 in 1997 and $4,162,000 in 1996).......................... 6,582,000 7,515,000
Inventories........................................................... 2,908,000 2,935,000
Current Portion of Employee Loan Receivable........................... 121,000 128,000
Other current assets.................................................. 504,000 386,000
-------------- --------------
TOTAL CURRENT ASSETS................................................ 15,388,000 18,429,000
PROPERTY, PLANT AND EQUIPMENT............................................ 5,163,000 5,071,000
Employee Loan Receivable................................................. 132,000 148,000
OTHER ASSETS............................................................. 7,786,000 6,700,000
-------------- --------------
$ 28,469,000 $ 30,348,000
-------------- --------------
-------------- --------------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable...................................................... 1,038,000 $ 1,472,000
Accrued expenses...................................................... 3,488,000 2,994,000
Current Portion of Capital Lease Obligation........................... 54,000 47,000
-------------- --------------
TOTAL CURRENT LIABILITIES........................................... 4,580,000 4,513,000
LONG TERM LIABILITIES:
Deferred Compensation................................................. 24,000 19,000
Other Long-Term Liabilities........................................... 247,000 247,000
Capital Lease Obligation.............................................. 3,461,000 3,478,000
Long-term debt........................................................ 10,000,000 10,000,000
-------------- --------------
TOTAL LONG-TERM LIABILITIES......................................... 13,732,000 $ 13,744,000
SHAREHOLDERS' EQUITY
Preferred Stock, $1.00 par value, authorized
and unissued-1,000,000 shares......................................... -- --
Class A Common Stock, $1.00 par value,
22,000,000 shares authorized; issued and outstanding
7,365,317 shares in 1997 and 7,358,964 shares in 1996............... 7,365,000 7,359,000
Class B Common Stock, $1.00 par value,
2,000,000 shares authorized; issued and outstanding
445,121 shares in 1997 and 445,387 shares in 1996 (convertible into 445,000 445,000
Class A Common Stock on a one for one basis)
Additional paid-in capital............................................... 25,120,000 25,086,000
Deficit.................................................................. (22,635,000) (20,640,000)
-------------- --------------
10,295,000 12,250,000
Equity adjustment from foreign currency translation...................... (138,000) (159,000)
-------------- --------------
10,157,000 12,091,000
-------------- --------------
$ 28,469,000 $ 30,348,000
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements
1
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BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
January 31,
--------------------------------------
1997 1996
---- ----
REVENUES
<S> <C> <C>
Sales................................................. $ 3,252,000 $ 3,611,000
Other................................................. 94,000 64,000
-------------- -------------
3,346,000 3,675,000
-------------- -------------
COSTS AND EXPENSES:
Cost of sales......................................... 2,572,000 2,458,000
Amortization of software medical cost................. 343,000 226,000
Research and development.............................. 161,000 325,000
Selling, general and administrative................... 1,903,000 1,877,000
Interest.............................................. 362,000 129,000
-------------- -------------
5,341,000 5,015,000
-------------- -------------
LOSS BEFORE INCOME TAXES.............................. (1,995,000) (1,340,000)
INCOME TAX BENEFIT.................................... -- (470,000)
-------------- -------------
NET LOSS.............................................. $(1,995,000) $ (870,000)
-------------- -------------
-------------- -------------
NET LOSS PER COMMON SHARE: $ (.26) $ (.11)
AVERAGE COMMON SHARES
OUTSTANDING:......................................... 7,808,453 7,699,985
</TABLE>
See Notes to Consolidated Financial Statements
2
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<TABLE>
<CAPTION>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED JANUARY 31, 1997
(Unaudited)
Equity
Adjustment
Common Stock From
---------------------------------------- Additional Foreign
Class A Class B Paid-in Currency
------- -------
Shares Amount Shares Amount Capital Deficit Translation
------ ------ ------ ------ ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -
October 31, 1996
(as Restated, See
Note G) 7,358,964 $7,359,000 445,387 $ 445,000 $25,086,000 $(20,640,000) $ (159,000)
Conversions of
Class B Common
to Class A Common 266 -- (266) -- -- -- --
Issuance of Common
Stock 6,087 6,000 -- -- 34,000 -- --
Foreign currency
translation -- -- -- -- -- -- 21,000
Net loss -- -- -- -- -- (1,995,000) --
--------- --------- ------- -------- ---------- ----------- ---------
Balance -
January 31, 1997
(as Restated, See
Note G) 7,365,317 $7,365,000 445,121 $ 445,000 $25,120,000 $(22,635,000) $(138,000)
--------- ---------- ------- -------- ---------- ----------- ---------
--------- ---------- ------- -------- ---------- ----------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
------------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,995,000) $ (870,000)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization 545,000 352,000
Accounts Receivable 942,000 (840,000)
Inventories 27,000 (110,000)
Employee Loan Receivable - net of current portion 23,000 (412,000)
Other current assets (120,000) 52,000
Accounts payable (414,000) (509,000)
Accrued expenses 337,000 141,000
Deferred compensation 5,000 (78,000)
Other assets (1,428,000) (654,000)
Income taxes payable -- (470,000)
Other long-term liabilities 144,000 (5,000)
------------ ------------
NET CASH USED IN OPERATIONS (1,934,000) (3,403,000)
------------ ------------
CASH FLOWS USED IN INVESTING
ACTIVITIES:
Additions to property, plant and equipment (207,000) (323,000)
Decrease in Long-Term Lease Obligation -
net of current portion (10,000) (12,000)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (217,000) (335,000)
------------ ------------
CASH FLOWS PROVIDED FROM FINANCING
ACTIVITIES:
Proceeds from issuance of common stock 40,000 244,000
------------ ------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 40,000 244,000
Effect of exchange rate change on cash (81,000) (83,000)
------------ ------------
NET DECREASE IN CASH (2,192,000) (3,577,000)
CASH, beginning of period 7,465,000 7,218,000
------------ ------------
CASH, end of period $ 5,273,000 $ 3,641,000
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 130,000 $ 130,000
------------ ------------
------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JANUARY 31, 1997
(Unaudited)
A. DESCRIPTION OF BUSINESS
Base Ten Systems, Inc. (OBase TenO or the OCompanyO) is engaged in the
design and manufacture of electronic systems employing safety critical software
for defense markets and the development of commercial applications focused on
manufacturing execution systems, medical screening and image processing
software. The Company also manufactures defense products to specifications for
prime government contractors and designs and builds proprietary electronic
systems for use in secure communications by various U.S. government agencies.
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/A for the fiscal year ended October 31, 1996. The
results of operations for the quarter ended January 31, 1997 are not
necessarily indicative of the operating results for the full year.
2. BASIS OF PRESENTATION - The Company's consolidated financial statements
have been prepared on a historical cost basis.
3. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Base Ten. All significant intercompany accounts,
transactions and profits have been eliminated.
4. REVENUE RECOGNITION - For Medical Software Products, the Company
evaluates each product and order on an individual basis to determine
the proper revenue recognition method. 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 the products or orders which are more standardized in
nature, revenue is recognized on delivery. For products in the
Government Technology Division earnings on long-term contracts are
recognized on the percentage-of-completion or unit-of-delivery basis.
Changes in estimates are accounted for using the cumulative catch up
method and are immaterial in each period presented.
On contracts where the percentage-of-completion method is used, costs
and estimated earnings in excess of progress billings are presented as
unbilled receivables. Unbilled costs of unit-of-delivery contracts are
included in inventory. Payments received in excess of costs incurred on
long-term contracts are recorded as customers' advance payments, which
are included as a reduction of inventory on the balance sheet.
5. INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
5
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Inventoried costs on contracts include direct material, labor and
applicable overhead. In accordance with industry practice, inventoried
costs include amounts relating to contracts with a long production
cycle, some of which are not expected to be realized within one year.
6. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
carried at cost and depreciated over estimated useful lives,
principally on the straight-line method. The estimated useful lives
used for the determination of depreciation and amortization are:
Leased asset - building 15 years
Machinery and equipment 3 to 10 years
Furniture and fixtures 3 to 20 years
7. OTHER ASSETS - Included in other non-current assets are software
development costs capitalized in accordance with Statement of Financial
Accounting Standard No. 86, "Accounting for Costs for Computer Software
to be Sold, Leased or Otherwise Marketed" issued by the Financial
Accounting Standards Board, the Company is required to capitalize
certain software development and production costs once technological
feasibility has been achieved. The cost of purchased software is
capitalized when related to a product which has achieved technological
feasibility or that has an alternative future use. The Company performs
quarterly reviews of the recoverability of its capitalized software
costs and other long lived assets based on anticipated revenues and
cash flows from sales of these products. The Company considers
historical performance and future estimated results in its evaluation
of potential impairment and then compares the carrying amount of the
asset to the estimated future cash flows expected to result from the
use of the asset. If the carrying amount of the asset exceeds estimated
expected undiscounted future cash flows, the Company measures the
amount of the impairment by comparing the carrying amount of the asset
to its fair value. The estimation of fair value is generally measured by
discounting expected future cash flows at the rate the Company utilizes
to evaluate potential investments. The Company estimates fair value
based on the best information available making whatever estimates,
judgments and projections are considered necessary.
8. CASH AND CASH EQUIVALENTS - The Company considers all investments with a
maturity of three months or less at date of acquisition to be cash
equivalents.
9. INCOME TAXES - Effective November 1, 1993, the Company adopted Statement
of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109), which requires a change from the deferred method's
income statement approach of accounting for income taxes to an asset
and liability approach of accounting for income taxes. Under the asset
and liability approach, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. This change has not had any
effect on the Company's Consolidated Statement of Operations.
10. RECENTLY ISSUED ACCOUNTING STANDARD - In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," which
requires adoption of the disclosure provisions no later than fiscal
years beginning after December 15, 1995 and adoption of the recognition
and measurement provisions for nonemployee transactions no later than
after December 15, 1995. The new standard defines a fair value method
of accounting for stock options and other equity instruments. Under the
fair value method, compensation cost is measured at the grant date
based on the fair value of the award and is recognized over the service
period, which is usually the vesting period.
Pursuant to the new standard, companies are encouraged, but are not
required, to adopt the fair value method of accounting for employee
stock-based transactions. Companies are also permitted to continue to
account for such transactions under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," but
6
<PAGE>
would be required to disclose in a note to the financial statements pro
forma net income and, if presented, earnings per share as if the
Company had applied the new method of accounting for all grants after
November 1, 1995.
The accounting requirements of the new method are effective for all
employee awards granted after the beginning of the fiscal year of
adoption. The Company has not yet determined if it will elect to change
to the fair value method, nor has it determined the effect the new
standard will have on net income and earnings per share should it elect
to make such a change. Adoption of the new standard will have no effect
on the Company's cash flows.
11. NET LOSS PER SHARE - Earnings per share for periods ended January 31,
1997 and 1996 were calculated using the number of weighted average
common shares outstanding.
Stock options, warrants and rights would have an anti-dilutive effect on
earnings per share for the periods included.
12. 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.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair market value of certain
financial instruments, including cash, accounts receivable, accounts
payable, and other accrued liabilities, approximate the amount recorded
in the balance sheet because of the relatively current maturities of
these financial instruments. The fair market value of long term debt at
January 31, 1997 and October 31, 1996 approximates the amounts recorded
in the balance sheet based on information available to the Company with
respect to interest rates and terms for similar financial instruments.
14. FOREIGN CURRENCY TRANSLATION - The accounts of the consolidated foreign
subsidiaries are translated into United States dollars in accordance
with Financial Accounting Standards Board (FASB) Statement No. 52.
Transaction gains and losses are immaterial.
7
<PAGE>
C. INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out method)
or market.
<TABLE>
<CAPTION>
JANUARY 31, 1997 OCTOBER 31, 1996
---------------- ----------------
<S> <C> <C>
Raw materials....................... $ 1,050,000 $ 1,232,000
Work in process..................... 1,627,000 1,383,000
Finished goods...................... 349,000 369,000
---------------- ----------------
3,026,000 2,984,000
Less advance payments............... 118,000 49,000
---------------- ----------------
$ 2,908,000 $ 2,935,000
---------------- ----------------
---------------- ----------------
</TABLE>
As provided in several of the Company's contracts, customers advance
funds to Base Ten for the purpose of purchasing inventory. The related
advances have been offset against inventory.
D. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
JANUARY 31, 1997 OCTOBER 31, 1996
---------------- ----------------
<S> <C> <C>
Machinery and equipment.............. $ 9,833,000 $ 9,668,000
Furniture and fixtures............... 713,000 705,000
Leased asset - land and building..... 3,600,000 3,600,000
Leasehold improvement 120,000 85,000
---------------- ----------------
14,266,000 14,058,000
Less accumulated depreciation
and amortization..................... 9,103,000 8,987,000
---------------- ----------------
$ 5,163,000 $ 5,071,000
---------------- ----------------
---------------- ----------------
</TABLE>
E. OTHER ASSETS
<TABLE>
<CAPTION>
January 31, 1997 October 31, 1996
---------------- ----------------
<S> <C> <C>
Patents (net of amortization) $ 368,000 $ 362,000
Capitalized costs 5,465,000 4,255,000
Unamortized bond issue costs 557,000 579,000
Deposit - long-term capital lease 550,000 550,000
Long-term receivable 681,000 770,000
Other 165,000 184,000
---------------- ----------------
$ 7,786,000 $ 6,700,000
---------------- ----------------
---------------- ----------------
</TABLE>
8
<PAGE>
F. LONG-TERM CAPITAL LEASE:
LEASES. The Company entered into a sale and leaseback arrangement on
October 28, 1994. Under the arrangement, the Company sold its main
building in Trenton, New Jersey and agreed to lease it back for a period
of 15 years under terms that qualify the arrangement as a capital lease.
The buyer/lessor of the building was a partnership. Two of the partners
are officers and directors of the Company. In addition, a non-interest
bearing security deposit of $550,000 was paid at closing and included in
other non-current assets on the balance sheet. Interest is calculated
under the effective interest method and depreciation will be taken using
the straight line method over the term of the lease.
The Company's future minimum lease payments related to the
sale-leaseback arrangement in effect at January 31, 1997 are as follows:
Fiscal
------
1997 $ 560,000
1998 560,000
1999 560,000
2000 615,000
2001 615,000
2002 5,354,000
----------
8,264,000
Less: Interest portion (4,749,000)
----------
Present value of net minimum payments $ 3,515,000
----------
----------
G. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
The Company has restated its consolidated financial statements for the
years ended October 31, 1996 and 1995. Subsequent to the issuance of the
Company's 1996 consolidated financial statements, the Company's
management determined that certain temporary salary reductions for
certain officers of the Company during fiscal 1995, and loans made to
such officers to be repaid by future bonuses, should have been recorded
as an increase to compensation expense with a corresponding increase to
additional paid-in-capital in the Company's 1995 consolidated financial
statements. As a result, the Company's 1996 and 1995 consolidated
financial statements have been restated from the amounts previously
reported to record these loans as a charge to operations and as an
increase to additional paid-in-capital in fiscal 1995. The impact of
these adjustments was to increase the previously reported 1995 net loss
by $502,000 and net loss per common share by $.07. The restatement had
no effect on the Company's cash position.
9
<PAGE>
A summary of the significant effects of the restatement is as follows
(dollar amounts in thousands, except per share data):
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
AS AS
PREVIOUSLY RESTATED
REPORTED
-----------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1995:
<S> <C> <C>
Selling, general and administrative expense $ 5,796 $ 6,298
Total operating expenses 19,656 20,158
Loss before income tax benefit (1,349) (1,851)
Net loss (875) (1,377)
Net loss per common share (.13) (.20)
-----------------------------------------------------------------------------------------
<CAPTION>
AT OCTOBER 31, 1995:
<S> <C> <C>
Additional paid-in capital $ 23,908 $ 24,410
Accumulated deficit (11,179) (11,681)
-----------------------------------------------------------------------------------------
<CAPTION>
AT OCTOBER 31, 1996:
<S> <C> <C>
Additional paid-in capital $ 24,584 $ 25,086
Accumulated deficit (21,142) (20,640)
-----------------------------------------------------------------------------------------
<CAPTION>
AT JANUARY 31, 1997:
<S> <C> <C>
Additional paid-in capital $ 24,618 $ 25,120
Accumulated deficit (22,133) (22,635)
</TABLE>
H. SUBSEQUENT EVENT
On May 30, 1997, the Company sold 55 units at $100,000 per unit, for
an aggregate of $5,500,000, to 3 non-U.S. resident, accredited
purchasers in a private offering. Each unit consisted of (i) a
convertible debenture in the principal amount of $100,000 convertible
into shares of the Company's Class A Common Stock, $1.00 par value,
and (ii) a warrant to acquire 1,800 shares of Class A Common Stock.
The number of shares of Class A Common Stock issuable upon conversion
of the Convertible Debentures is variable and will be calculated at
the time of conversion based upon the market price of the Class A
Common Stock contemporaneously with the conversion. The Convertible
Debentures are not convertible prior to December 16, 1997. From
December 16, 1997 until February 23, 1998, one-half of the
Convertible Debentures may be converted at a discount of ninety-five
percent. After February 23, 1998, the Convertible Debentures are
fully convertible and may be converted at a discount of ninety-two
percent. The Warrants may be exercised at any time prior to 5:00 P.M.
on May 30, 2002 at an exercise price of $12.26 per share. The Company
received net proceeds of approximately $4,950,000 from the sale of
the Units after deduction of fees and expenses related to the
private offering.
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL.
Base Ten Systems, Inc. (the "Company") operates with a Medical Technology
Division and a Government Technology Division and designs, develops,
manufactures and markets complex, precision electronic systems for the defense
industry and comprehensive software solutions for the pharmaceutical and medical
device manufacturing industries. The Company's products are used in safety
critical applications requiring consistent, highly reliable outcomes where an
out-of-specification event could have a catastrophic result. The Company
developed a core competency in safety critical applications from its historical
focus on designing electronic systems used primarily in weapons management
systems for military aircraft. The Company has applied this expertise to develop
PHARMASYST(R), a computerized Manufacturing Execution System ("MES") used to
automate, monitor, control and document highly regulated manufacturing
processes.
PHARMASYST operates on a PC-based system in an open client / server
environment and can be readily integrated with industry standard server database
engines. PHARMASYST is designed and marketed as a standard application, not a
custom solution or toolkit, for implementation into a customer's existing
manufacturing facility. PHARMASYST acts as an electronic monitor ensuring that
the production process complies with a predefined set of specifications in order
to produce a consistent product. The Company believes that PHARMASYST is the
premier commercially available PC-based standardized MES solution capable of the
necessary functionality and supporting documentation suitable for regulated
manufacturing in the pharmaceutical and medical device industries. The Company
is engaged in a continuing program to reach compliance with an industry
generated standard for Good Automated Manufacturing Practice (GAMP) as a means
of differentiating itself from present and future competition.
The Company has entered into collaborative relationships with certain
computer system integrators and others that can integrate PHARMASYST with the
products and services they provide. The Company has established a relationship
with STG-Coopers & Lybrand Consulting AG, Walsh Automation, a Canadian systems
integrator, WTI Systems Ltd, an English Systems Integrator, Toyo Engineering
Co., a Japanese developer of turnkey manufacturing facilities, Bailey Controls
Company, a provider of distributed control systems, Intellution, Inc., a
supplier of manufacturing systems for the pharmaceutical industry, the Taisei
Corporation, a $15 billion construction and engineering company in Japan, and
most recently with Peat Marwick KPMG.
The Company develops and manufactures weapons management systems and other
defense-related products. Currently, the Company has ongoing development
contracts with McDonnell Douglas Helicopter Systems, McDonnell Douglas
Aerospace, Daimler-Benz AG, Aerospace, and the U.S. Air Force. Most of these
contracts relate to upgrading weapons systems for existing aircraft fleets. In
1996 the Company entered into a program with McDonnell Douglas Helicopter
Systems to develop helicopter Maintenance Data Recorders. In addition, the
Company entered into a contract with McDonnell Douglas Aerospace for an
Interference Blanker Unit used aboard the F-18. A contract for the completion of
the product design and early production for components of the SLAM ER missile
system was awarded to the Company in October, 1996.
RESULTS OF OPERATIONS
NONDEFENSE OPERATIONS- During 1996 the Company focused on the development of
PHARM2, an advanced version of the PHARMASYST product introduced in 1995. At the
end of the year the Company had contracts or signed License Agreements for
installation at a total of 32 sites from a total of eighteen manufacturers or
their integrators including Abbot Hospital Products, Pfizer International
Products Group, SmithKline Beecham, Pharmacia & Upjohn, 3M, Novo Nordisk,
Taisei, Berlex, and Wyeth. More recently the Company has added Roche, Astra, and
an additional contract from Pharmacia & Upjohn.
11
<PAGE>
Although the Company has made delivery of the first release of PHARM2, other
deliveries of PHARM2 are overdue. Although cancellation for late deliveries may
occur, the Company does not anticipate the loss of material orders as a result
thereof.
The Company sells PHARM2 through direct salespersons operating out of its
headquarters in New Jersey; Laguna Niguel, California; Camberley, England;
Brussels, Belgium; Copenhagen, Denmark; and Tokyo, Japan. The Tokyo office was
opened in January, 1997 in response to opportunities under development in the
Pacific Rim. In addition to direct selling, the Company has developed
relationships with implementers and integrators already active in this market to
increase the number of opportunities available to it to demonstrate and offer
its products (See "General" above).*
During the first quarter the Company engaged an internationally recognized
consulting organization to assist it in the further development and refinement
of procedures and documentation for the Company to be fully compliant with the
principles embodied in GAMP. GAMP is the output of an industry group defining
the methodology for creation of software products for the pharmaceutical
industry. Although no assurances can be given, the Company believes that
completion of this effort will provide significant added value to the Company's
ability to sell in this market since it will further differentiate the Company
from its competition.* The Company has strengthened its Quality Assurance
organization through the employment of personnel familiar with pharmaceutical
manufacturing practice.
The Company recently announced the validation of PHARMASYST at the Canadian
manufacturing facility of a major pharmaceutical company and one of the
Company's principal clients. The value of validation will be realized in the
increased acceptance of the Company's products by other pharmaceutical
companies.* Although the Company generates revenue and cash upon delivery of
PHARM2 to its clients, it is necessary for a pharmaceutical company to validate
its equipment and processes in order to satisfy FDA regulations and PHARM2 is a
critical portion of the manufacturing activity. The Company announced its first
validated site in October, 1996.
During the period, the Company strengthened its technical resources through
the addition of development staff in both Camberley, England and in its New
Jersey headquarters. The Company considers its technical staff to be a primary
resource and crucial to its continuance in this business area. Loss of any
portion of its technical resources would be injurious and loss of a significant
portion of its technical staff could cause serious and immediate damage to the
Company's business. The Company believes it has good relations with its
technical staff.
DEFENSE OPERATIONS. During the first quarter the Company concentrated on the
development tasks related to the Interference Blanker Unit (IBU) awarded to the
Company in mid-1996, the development tasks related to the Maintenance Data
Recorder also awarded to the Company in mid 1996, and the development tasks
related to the SLAM ER missile contract awarded in October, 1996. This activity
engaged primarily technical staff and was responsible for the major part of the
income generated by the Government Technology Division.
In addition, the Company continued its development of additional software
for the Tornado program, the Company's most successful product. The Tornado
program extends beyond the year 2000 and could offer the Company significant
additional business.* The Company has been asked to provide cost and pricing
information for additional production for the Tornado Stores Management System.
This contract, if awarded, could result in $10 to $12 million of new business.
It is expected that this contract will be awarded in 1997, although no assurance
can be provided that the Company will be a recipient of this award.*
The Company continues to seek additional sources of business in the weapons
control area concentrating on those opportunities where the Company's technical
skills are relevant.
QUARTER ENDED JANUARY 31, 1997 COMPARED WITH THE QUARTER ENDED JANUARY 31,
1996. Revenues for the current quarter were $3,346,000 compared with $3,675,000
for the first quarter of fiscal 1996. The difference in revenues resulted
primarily from a decrease in revenues of the Medical Technology Division from
$895,000 in 1996 to $200,000 in 1997. The decrease in revenues in 1997
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was due to the Company's current policy of not recognizing revenue on its
PHARM2 products until delivery was effected. This decrease was partially
offset by an increase in revenues from the Government Technology Division.
The Company recognized a net loss of $1,995,000 in the first quarter of 1997
compared with a net loss of $870,000 in the corresponding quarter in 1996. The
increase in the loss is due primarily to the reduced Medical Technology revenues
and the increase in interest costs. The interest increase is due to interest
incurred on the $10 million Convertible Debenture sold in August, 1996. In
addition, the Company had an income tax benefit of $470,000 in 1996 while none
was available in 1997.
Cost of sales for the first quarter of 1997 was 76.9% of revenues compared
with 66.9% of revenues for the same period in 1996. The increase was due
primarily to the reduced revenues from PHARMASYST products which have a
significantly lower cost of sales than defense related products. Since the
development costs are largely capitalized, the remaining costs of labor and
overhead are relatively low compared with resulting revenue. In addition,
several significant differences occurred in the 1997 first quarter compared with
the 1996 first quarter related to cost of sales. In 1997 the purchased material
cost declined to $287,000 compared with $764,000 in purchased material in 1996.
In addition, the cost of contract labor in 1997 was $502,000 compared with
$56,000 in 1996 and the cost of direct labor in 1997 was $1,210,000 compared
with $798,000 in 1996. The difference in the two years resulted from a shift
from a manufacturing environment in the Government Technology Division in 1996
to an engineering environment since current orders are concentrated on
development rather than hardware manufacture. The increase in contract labor
also resulted from the engagement of outside personnel to assist in the testing
of PHARM2, a cost which was not incurred in 1996.
Research and development expenses declined in the first quarter of 1997 to
$161,000 from $325,000 in the comparable quarter in 1996. Since the Government
Technology Division was primarily engaged in development of customer ordered
products, reduced resources were available for development work at Company
expense. Research and development expenses do not include the capitalized
software development costs of $1,488,000 and $715,000 for the first quarter of
1997 and 1996, respectively. The Company's investment on a cash flow basis
includes both of these components.
Selling, general and administrative expenses remained relatively constant
for the two periods although there were variations in the components of the SG&A
expense. Selling salaries increased from $181,000 for the 1996 first quarter to
$232,000 in 1997 and the consulting costs increased to $161,000 from $101,000 in
the first quarter of 1996.
Amortization of Medical Technology Division software increased in 1997 as
the amount of capitalized software for PHARMASYST products increased through the
prior twelve months.
The Company has restated its consolidated financial statements for the years
ended October 31, 1996 and 1995. Subsequent to the issuance of the Company's
1996 consolidated financial statements, the Company's management determined that
certain temporary salary reductions for certain officers of the Company during
fiscal 1995, and loans made to such officers to be repaid by future bonuses,
should have been recorded as an increase to compensation expense with a
corresponding increase to additional paid-in-capital in the Company's 1995
consolidated financial statements. As a result, the Company's 1996 and 1995
consolidated financial statements have been restated from the amounts previously
reported to record these loans as a charge to operations and as an increase to
additional paid-in-capital in fiscal 1995. The impact of these adjustments was
to increase the previously reported 1995 net loss by $502,000 and net loss per
common share by $.07. The restatement had no effect on the Company's cash
position.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter the Company used $1.9 million of cash in its
operations. The use of cash from operations was due primarily to the
Company's expenditure of approximately $1.5 million for the development of
its PHARMASYST products and the Company's net loss for the quarter. Cash used
in investing activities during the first quarter of $.2 million was due
primarily to the purchase of property, plant and equipment. Net cash provided
from financing activities was attributable to the
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exercise of options for the purchase of the Company's common stock. The
combined use of cash from all activities during the quarter was $2.2 million
for the reasons stated above. At January 31, 1997 the Company's cash and
other liquid assets were $5.3 million.
The Company recently obtained a $1 million line of credit facility with a
local bank, which expires in February 1998. Interest is 1% above the bank's
prime lending rate and the credit line is collateralized by accounts
receivable. There currently are no amounts outstanding under the credit line.
On May 1, 1997 the Company entered into a agreement whereby it became a
minority owner of a limited liability corporation (LLC). Under the terms of
the agreement, the Company made a capital contribution to the LLC of its
rights to its uPACS technology which is a system for archiving ultrasound
images with networking, communication and off-line measurement capabilities.
In exchange for such capital contribution, the Company received a 9% interest
in the LLC. An outside investor made a capital contribution of $2 million and
agreed to make a further capital contribution of $1 million on or before
December 1, 1997, in return for a 91% interest in the LLC. The Company
believes that the funds available under the LLC will be sufficient to fund
operations in connection with uPACS for approximatley eighteen months.* In
connection with the formation of the LLC, the Company entered into a Services
and License Agreement whereby the Company has agreed to complete the
development of the uPACS technology and undertake to market, sell and
distribute systems using the uPACS technology. The LLC will pay the Company
its expenses in connection with such services and remit to the LLC royalties
in connection with the sale of systems using the uPACS technology. At such
time as the LLC has distributed to the outside investor an aggregate amount
equal to $4.5 million of its net cash flow, the Company would become a 63%
owner of the LLC and the outside investor will own a 37% interest in the LLC.
There can be no assurance that uPACS will be successful or that the LLC
will operate profitable or that the funds under the LLC will be sufficient
for the further development and marketing of uPACS.
On May 30, 1997, the Company sold 55 units ("Units") at $100,000 per
Unit, for an aggregate of $5,000,000, to 2 accredited purchasers
("Purchasers") in a private offering (the "Offering"). Each Unit consisted of
(i) a convertible debenture ("Convertible Debenture") in the principal amount
of $100,000 convertible into shares of the Company's Class A Common Stock,
$1.00 par value ("Class A Common Stock"), and (ii) a warrant ("Warrant') to
acquire 1,800 shares of Class A Common Stock. The number of shares of Class A
Common Stock issuable upon conversion of the Convertible Debentures is
variable. The number of shares will be calculated at the time of conversion
and will be the lesser of (i) the product obtained by multiplying (x) the
lesser of the average of the closing bid prices for the Class A Common Stock
for the (A) five or (B) thirty consecutive trading days ending on the trading
day immediately preceding the date of determination by (y) a conversion
percentage equal to 95% with respect to any conversions occurring prior to
February 24, 1998 and 92% with respect to any conversions occurring on or
after February 24, 1998 and (ii) $13.50 with respect to any conversions
occurring prior to May 30, 1998 or (y) $14.00 with respect to any conversions
occurring on or after May 30, 1998. The Convertible Debentures are not
convertible prior to December 16, 1997. From December 16, 1997 until February
23, 1998, one-half of the Convertible Debentures may be converted and after
February 23, 1998, the Convertible Debentures are fully convertible. The
Warrants may be exercised at any time through May 30, 2002 at an exercise
price of $12.26 per share.
The Company received net proceeds of approximately $4,950,000 from the
sale of the Units after deduction of fees and expenses related to the
Offering. In connection with the Offering, transaction fees aggregating
$293,000 were paid to Tail Wind Inc., the manager of one of the Purchasers,
for services rendered in its capacity as representative of the Purchasers,
and advisory fees aggregating $165,000 were paid to Strategic Growth
International, Inc., the Company's financial consultant. In addition,
Alexander M. Adelson, a director of the Company, received warrants to
purchase 27,500 shares of Class A Common Stock at an exercise price of
$10.125 per share and $55,000 for advisory services rendered in connection
with the Offering.
The Company believes that cash generated by operations and existing
capital resources in combination with such credit facility, the funds
available from the LLC, and the net proceeds of the sale of the convertible
debentures, will be sufficient to fund its operations through fiscal year end
1997. In addition, the Company is relying on the continued successful
development of its Medical Technology Division leading product PHARM2, during
the third quarter of calendar 1997 to stimulate new orders and permit the
delivery of existing orders. If the Company should not receive currently
anticipated orders in time and in the amounts planned during fiscal 1997 the
Company may need to reduce its operating costs. The effect of these
reductions could have an adverse affect in the Company's ability to market,
develop, and implement its products with the results that the Company may
continue to incur losses.*
*FORWARD LOOKING INFORMATION
THE FOREGOING CONTAINS FORWARD LOOKING INFORMATION WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS APPEAR IN A
NUMBER OF PLACES AND CAN BE IDENTIFIED BY AN "ASTERISK" REFERENCE TO A
PARTICULAR SECTION OF THE FOREGOING OR BY THE USE OF SUCH FORWARD-LOOKING
TERMINOLOGY SUCH AS "BELIEVE", "EXPECT", "MAY", "WILLO, OSHOULDO OR THE NEGATIVE
THEREOF OR VARIATIONS THEREOF. SUCH FORWARD LOOKING STATEMENTS INVOLVE CERTAIN
RISKS AND UNCERTAINTIES, INCLUDING THE PARTICULAR FACTORS DESCRIBED ABOVE IN
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS AS WELL AS THROUGHOUT THIS REPORT. IN
EACH CASE ACTUAL RESULTS MAY DIFFER MATERIALLY FROM SUCH FORWARD LOOKING
STATEMENTS. 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 (EXPRESSED OR IMPLIED) WILL NOT BE REALIZED.
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PART II. OTHER INFORMATION
Item 2: Changes in Securities
None.
Item 6: Exhibits and Reports on Form 8-K
(a) EXHIBITS - None.
(b) REPORTS ON FORM 8-K - None.
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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: May 16, 1997
BASE TEN SYSTEMS, INC.
(Registrant)
By: /s/ MYLES M. KRANZLER
---------------------------------
Myles M. Kranzler
President and Chairman of the
Board
(Principal Executive Officer)
By: /s/ EDWARD J. KLINSPORT
----------------------------------
Edward J. Klinsport
Executive Vice President and
Chief
Financial Officer
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