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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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
Part I. Financial Information Page
Consolidated Balance Sheets -- January 31, 1997 (unaudited)
and October 31, 1996 (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 (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
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
January 31, 1997 October 31, 1996
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
CURRENT ASSETS:
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
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
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 ...... 445,000 445,000
Additional paid-in capital ............................... 24,618,000 24,584,000
Deficit .................................................. (22,133,000) (20,138,000)
------------ ------------
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
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
January 31,
---------------------------
1997 1996
---- ----
REVENUES
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
See Notes to Consolidated Financial Statements
2
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED JANUARY 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Equity
Common Stock Adjustment
---------------------------------------------------- From
Class A Class B Additional Foreign
------- ------ Paid-in Currency
Shares Amount Shares Amount Capital Deficit Translation
------ ------ ------ ------ ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -
October 31, 1996 7,358,964 $ 7,359,000 445,387 $ 445,000 $ 24,584,000 $(20,138,000) $ (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 7,365,317 $ 7,365,000 445,121 $ 445,000 $ 24,618,000 $(22,133,000) $ (138,000)
========= ============ ======= ============ ============ ============ ============
</TABLE>
See Notes to Consolidated Statements
3
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
January 31,
-------------------------
1997 1996
---- ----
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-net (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) INCREASE 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
----------- -----------
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. ("Base Ten" or the "Company") 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 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.
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
<PAGE>
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". 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.
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
6
<PAGE>
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 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 Earnings/(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.
7
<PAGE>
C. Inventories:
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
January 31, 1997 October 31, 1996
---------------- ----------------
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
========== ==========
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:
January 31, 1997 October 31, 1996
---------------- ----------------
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
=========== ===========
E. Other Assets
January 31, 1997 October 31, 1996
===========================================================================
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
---------------------------------------------------------------------------
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
===========
9
<PAGE>
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
10
<PAGE>
from Pharmacia & Upjohn.
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
11
<PAGE>
Technology Division from $895,000 in 1996 to $200,000 in 1997. The decrease in
revenues in 1997 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 $1,284,000 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.
Liquidity and Capital Resources
During the first quarter the Company used $2.2 million of cash in its
operations. The use of cash was due primarily to the Company's expenditure of
approximately $1.3 million for the development of its PHARMASYST products and
the Company's net loss for the quarter. At January 31, 1997 the Company's cash
and other liquid assets were $5.3 million.
The Company believes that cash generated by operations and existing capital
resources in combination with the $1 million credit line recently initiated with
a local bank will be sufficient to fund its operations at least through the end
of fiscal 1997 providing it receives substantial orders for its commercial
products and currently anticipated orders for its Government Technology Division
materialize as expected.*
As a result, the Company is relying on the completion of its Medical
Technology Division
12
<PAGE>
leading product, PHARM2, during the first quarter of calendar 1997 to stimulate
new orders and permit the delivery of existing orders. Existing orders are not
expected to begin to generate cash until approximately 60 days of delivery and
new orders are not expected to begin to generate initial cash receipts until at
least 60 days of order with the balance generally within 60 days after delivery.
However, neither the completion of PHARM2 nor the resulting generation of cash
from it or government contracts can be assured either in time or amount or that
such amounts will be sufficient for the Company's needs. Because such orders or
the promise thereof cannot be assured, the Company intends currently to seek
additional sources of capital and may also elect to reduce the pace of its
development of Medical Technology Division products or establish other cost
reduction measures, which could adversely impact the Company. Although the
Company has elected to seek additional capital there can be no assurance that
such funds or capital will be available at the time or in the amount needed.*
*FORWARD LOOKING INFORMATION
The foregoing contains forward looking information within the meaning of
The Private Securities Litigation Reform Act of 1995. Such forward looking
statements involve certain risks and uncertainties, including the particular
factors described above in this Management Discussion and Analysis as well as
the operational success of its PHARM2 products; the ability of the Company to
successfully market, sell and deliver its PHARM2 products; the timeliness of
booking new orders for its defense products; the ability of the Company to
generate sufficient cash from operations to sustain continued development of its
products; and the ability of the Company to obtain necessary additional equity
or debt financing. 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.
13
<PAGE>
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.
14
<PAGE>
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: March 17, 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
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information for the quarter ended
January 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 5,273,000
<SECURITIES> 0
<RECEIVABLES> 6,582,000
<ALLOWANCES> 0
<INVENTORY> 2,908,000
<CURRENT-ASSETS> 15,388,000
<PP&E> 5,163,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,469,000
<CURRENT-LIABILITIES> 4,580,000
<BONDS> 0
0
0
<COMMON> 7,810,000
<OTHER-SE> 2,437,000
<TOTAL-LIABILITY-AND-EQUITY> 28,469,000
<SALES> 3,252,000
<TOTAL-REVENUES> 3,346,000
<CGS> 2,572,000
<TOTAL-COSTS> 5,341,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 362,000
<INCOME-PRETAX> (1,995,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,995,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,995,000)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
