<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended July 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 OUTSTANDING AS OF
CLASS AUGUST 30, 1997
------------- -----------------
Class A Common Stock, $1.00 par value................... 7,497,360
Class B Common Stock, $1.00 par value................... 445,121
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<PAGE>
BASE TEN SYSTEMS, INC.
AND SUBSIDIARIES
I N D E X
Part I. Financial Information Page
Consolidated Balance Sheets -- July 31, 1997 (unaudited)
and October 31, 1996 (audited)............................ 1
Consolidated Statements of Operations--Three months
and nine months ended July 31, 1997 and 1996
(unaudited)............................................. 2
Consolidated Statements of Shareholders' Equity--Nine
months ended July 31, 1997 (unaudited).................. 3
Consolidated Statements of Cash Flows--Nine months
ended July 31, 1997 and 1996 (unaudited)................ 4
Notes to Consolidated Financial Statements................ 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 12
Part II Other Information
Item 4: Submission of Matters to a Vote of
Security Holders................................. 19
Item 6: Exhibits and Reports on Form 8-K............ 19
<PAGE> BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
AS OF AS OF
JULY 31, 1997 OCTOBER 31, 1996
--------------- ----------------
(UNAUDITED) (AUDITED)
CURRENT ASSETS:
Cash............................ $ 3,771,000 $ 7,465,000
Accounts receivable
(including unbilled
receivables of $4,122,000
in 1997 and $3,902,000
in 1996)...................... 7,181,000 7,515,000
Inventories..................... 3,868,000 2,935,000
Current portion of employee
loan receivable............... 128,000 128,000
Other current assets............ 601,000 386,000
----------- -----------
TOTAL CURRENT ASSETS.......... 15,549,000 18,429,000
PROPERTY, PLANT AND EQUIPMENT..... 5,209,000 5,071,000
EMPLOYEE LOAN RECEIVABLE.......... 47,000 148,000
OTHER ASSETS...................... 8,717,000 6,700,000
----------- -----------
$29,522,000 $30,348,000
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................ $1,045,000 $1,472,000
Accrued expenses................ 3,693,000 2,994,000
Current portion of capital
lease obligation............... 54,000 47,000
----------- -----------
TOTAL CURRENT LIABILITIES..... 4,792,000 4,513,000
LONG TERM LIABILITIES:
Other long-term liabilities..... 272,000 266,000
Capital lease obligation........ 3,441,000 3,478,000
Long-term debt.................. 15,500,000 10,000,000
----------- -----------
TOTAL LONG-TERM
LIABILITIES................. 19,213,000 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 7,497,360 shares
in 1997 and 7,358,964 shares
in 1996 ...................... 7,497,000 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...... 25,603,000 25,086,000
Deficit......................... (27,885,000) (20,640,000)
----------- -----------
5,660,000 12,250,000
Equity adjustment from
foreign currency translation.. (143,000) (159,000)
----------- -----------
5,517,000 12,091,000
----------- -----------
$29,522,000 $30,348,000
----------- -----------
----------- -----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
----------------- ------------------
July 31 July 31
------- -------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
------ ------ ------ -----
REVENUES
Sales................................................ $ 9,808,000 $ 10,352,000 $ 3,618,000 $ 2,973,000
Other................................................ 133,000 150,000 20,000 59,000
------------- ------------- ------------- -------------
9,941,000 10,502,000 3,638,000 3,032,000
------------- ------------- ------------- -------------
COSTS AND EXPENSES:
Cost of sales........................................ 8,322,000 7,683,000 3,430,000 2,489,000
Research and development............................. 490,000 811,000 158,000 249,000
Selling, general and administrative.................. 6,114,000 6,316,000 2,018,000 2,421,000
Write-off of software development costs.............. -- 2,429,000 -- --
Amortization of software medical cost................ 1,121,000 807,000 440,000 246,000
Interest............................................. 1,139,000 392,000 409,000 132,000
------------- ------------- ------------- -------------
17,186,000 18,438,000 6,455,000 5,537000
------------- ------------- ------------- -------------
LOSS BEFORE INCOME TAXES............................... (7,245,000) (7,936,000) (2,817,000) (2,505,000)
INCOME TAXES........................................... -- -- -- --
------------- ------------- ------------- -------------
NET LOSS............................................... $ (7,245,000) $ (7,936,000) $ (2,817,000) $ (2,505,000)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
NET LOSS PER COMMON SHARE.............................. $ (.92) $ (1.04) $ (.35) $ (.33)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............. 7,852,453 7,660,300 7,928,516 7,565,040
</TABLE>
See Notes To Consolidated Financial Statements
2
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED JULY 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 $ 25,086,000 $ (20,640,000) $ (159,000)
Conversions of Class B
Common to Class A Common.. 266 (266)
Exercise of options......... 132,043 132,000 517,000
Issuance of Common
Stock..................... 6,087 6,000
Foreign currency
translation............... 16,000
Net loss.................... (7,245,000)
----------- ------------ --------- ---------- ------------- -------------- -----------
Balance -
July 31, 1997............. 7,497,360 $ 7,497,000 445,121 $ 445,000 $ 25,603,000 $ (27,885,000) $ (143,000)
----------- ------------ --------- ---------- ------------- -------------- -----------
----------- ------------ --------- ---------- ------------- -------------- -----------
</TABLE>
SEE NOTES TO CONSOLIDATED STATEMENTS
3
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................................... $ (7,245,000) $ (7,936,000)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization..................................................... 1,474,000 1,224,000
Write-off of software development
costs............................................................................ -- 2,429,000
Accounts receivable............................................................... 352,000 270,000
Inventories....................................................................... (934,000) 80,000
Other current assets.............................................................. (110,000) 67,000
Accounts payable.................................................................. (400,000) (210,000)
Accrued expenses.................................................................. 295,000 836,000
Customers' advance payments....................................................... 390,000 158,000
Deferred compensation............................................................. -- (66,000)
Other assets...................................................................... (3,147,000) (2,622,000)
Other long-term liabilities....................................................... 6,000 (14,000)
Income taxes payable.............................................................. -- (3,000)
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NET CASH USED IN OPERATIONS....................................................... (9,319,000) (5,787,000)
------------- -------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment-net.................................... (487,000) (697,000)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES............................................. (487,000) (697,000)
------------- -------------
CASH FLOWS PROVIDED FROM (USED IN) FINANCING ACTIVITIES:
Repayment of amounts borrowed..................................................... (31,000) (32,000)
Proceeds from Issuance of Convertible Debenture................................... 5,500,000 --
Proceeds from issuance of common stock............................................ 655,000 569,000
------------- -------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES....................................... 6,124,000 537,000
Effect of exchange rate change on cash............................................ (12,000) (14,000)
------------- -------------
NET DECREASE IN CASH................................................................ (3,694,000) (5,961,000)
CASH, beginning of period........................................................... 7,465,000 7,221,000
------------- -------------
CASH, end of period................................................................. $ 3,771,000 $ 1,260,000
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest.......................................... $ 1,089,000 $ 390,000
------------- -------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Retirement of treasury stock...................................................... $ -- $ 7,000
------------- -------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JULY 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.
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 three months and nine months ended
July 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 revenues 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 revenues 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:
<TABLE>
<S> <C>
Leased asset--building 15 years
Machinery and equipment 3 to 10 years
Furniture and fixtures 3 to 20 years
</TABLE>
7. Write-off of Capitalized Software Development Costs - A portion of the
Company's software development costs since 1991 have been capitalized
and included in other non-current assets in accordance with the
Statement of Financial Accounting Standard No. 86, "Accounting for
Costs for Computer Software to be Sold, Leased or Otherwise Marketed"
(SFAS 86), requiring the amortization of these costs over the estimated
economic life of the product. See "Other Assets" below. The Company
performs quarterly reviews of the recoverability of its capitalized
software costs based on anticipated revenues and cash flows from sales
of these products. In the second quarter of fiscal 1996 the Company
conducted its regular quarterly review of the recoverability of its
capitalized software development costs and determined that neither its
PRENVAL nor its uPACS products would achieve sufficient revenues in
future periods to justify retention of the related capitalized costs
as productive assets. To confirm its determination, the Company
reviewed the marketing chronology related to these products. With
respect to PRENVAL, it became apparent to the Company in late
February 1996, after a discussion with the licensee, that enhancements
that are not developed or available for the product were being
requested by customers who had a chance to use and test the product
during the first quarter of fiscal 1996, and that, as a result, sales
would not exceed the amount necessary to generate additional royalties
in excess of the minimum required under the license. Thereafter, in
May 1996, the Company determined that the licensee had no current plans
to market the product in the U.S. as was originally anticipated by the
Company. With respect to uPACS, the Company has implemented sales
efforts in late 1995 and displayed the product at certain trade shows
in Europe. In December 1995, sales were anticipated for early 1996.
However, by early April 1996 it became clear that the anticipated
sales would not materialize. The Company concluded that the product,
as it then existed, would not generate sufficient sales to recover
the capitalized costs, and that only a new product with networking,
communications and off-line measurement capabilities was marketable.
Accordingly the Company wrote off $2.4 million of such capitalized
costs in the 1996 second fiscal quarter.
8. Other Assets - Included in other non-current assets are software
development costs capitalized in accordance with SFAS 86, OAccounting
for Costs for Computer Software to be Sold, Leased or Otherwise
Marketed", pursuant to which 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. Software development
costs incurred prior to achieving technological feasibility are charged
to research and development expense as incurred. 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
6
<PAGE>
available making whatever estimates, judgments and projections are
considered necessary. Commencing upon initial product release, these
costs are amortized based on the straight-line method over the
estimated life.
9. 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.
10. 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.
11. Recently Issued Accounting Standards - In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123), which required 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 requires
disclosure 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.
The Financial Accounting Standards Board issued Statement of Accounting
Standards No. 128, "Earnings Per Share" ("FAS 128"). The Company is
required to adopt FAS 128 for both interim and annual periods ending
after December 15, 1997. FAS 128 requires the Company to present Basic
Earnings Per Share which excludes dilution and Diluted Earnings Per
Share which includes potential dilution. The Company believes that the
adoption of FAS 128 will not have a material effect on the Company's
earning per share calculations.
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 130, "Reporting Comprehensive Income," which is effective for
financial statement periods beginning after December 15, 1997. This
statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. The
Company believes that the information to be included in deriving
comprehensive income, although not currently presented in a separate
financial statement, is disclosed as a part of these financial
statements.
7
<PAGE>
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" which is effective for financial statement periods
beginning after December 15, 1997. This statement establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that
these enterprises report selected information about operating segments
in interim financial reports issued to shareholders. This Statement
supersedes SFAS No. 14 and amends SFAS No. 94. The Company is currently
evaluating the impact to its current financial statements of the
implementation of SFAS 131.
12. Net Earnings/(Loss) Per Share - Earnings per share for periods ended
July 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.
13. 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.
14. 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 July 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.
15. 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.
16. Change in Presentation--Certain balance sheet items for the interim
period in fiscal 1996 have been reclassified to conform to the 1997
presentation.
C. INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
<TABLE>
<CAPTION>
JULY 31, 1997 OCTOBER 31, 1996
----------------- -------------------
<S> <C> <C>
Raw materials................................................... $ 1,287,000 $ 1,232,000
Work in process................................................. 2,321,000 1,383,000
Finished goods.................................................. 578,000 369,000
------------ -------------
4,186,000 2,984,000
Less advance payments........................................... 318,000 49,000
------------ -------------
$ 3,868,000 $ 2,935,000
------------ -------------
------------ -------------
</TABLE>
8
<PAGE>
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>
JULY 31, 1997 OCTOBER 31,996
------------- ---------------
<S> <C> <C>
Machinery and equipment..................................... $ 10,105,000 $ 9,668,000
Furniture and fixtures...................................... 723,000 705,000
Leased asset--land and building............................. 3,600,000 3,600,000
Leasehold improvement....................................... 120,000 85,000
------------- ---------------
14,548,000 14,058,000
Less accumulated depreciation and amortization.............. 9,339,000 8,987,000
------------- ---------------
$ 5,209,000 $ 5,071,000
------------- ---------------
------------- ---------------
</TABLE>
E. OTHER ASSETS:
<TABLE>
<CAPTION>
JULY 31, 1997 OCTOBER 31, 1996
------------- ----------------
<S> <C> <C>
Patents (net of amortization)......................... $ 386,000 $ 362,000
Capitalized costs..................................... 6,313,000 4,255,000
Unamortized bond issue costs.......................... 1,104,000 579,000
Deposit--long-term capital lease...................... 550,000 550,000
Long-term receivable.................................. 200,000 770,000
Other................................................. 164,000 184,000
------------ ---------------
$8,717,000 $ 6,700,000
------------ ---------------
------------ ---------------
</TABLE>
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. One of the partners is a
current officer and director 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.
9
<PAGE>
The Company's future minimum lease payments related to the sale-leaseback
arrangement in effect at July 31, 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL
------
<S> <C>
1997 $ 560,000
1998 560,000
1999 560,000
2000 615,000
2001 615,000
2002 and thereafter 5,344,000
-----------
8,254,000
Less: Interest portion (4,759,000)
------------
Present value of net minimum payments $ 3,495,000
------------
------------
</TABLE>
G. LONG-TERM DEBT:
In August 1996, the Company sold $10.0 million of its 9.01% Convertible
Subordinate Debentures due August 31, 2003. Under the terms of the
Debentures, the holder can convert the Debentures into the Company's Class A
Common Stock, at $12.50 per share, 125% of the closing price on
August 9, 1996. The Company has the right to call the Debentures after
February 28, 1998, if the Company's stock price trades at certain levels
between 150%--175% of the closing price, or $15-$17.50 per share. The
Company's financing costs relating to such Debentures amounted to
approximately $.6 million. These costs are being amortized over the
life of the loan.
In May 1997, the Company sold 55 units ("Units") at $100,000 per Unit, for
an aggregate of $5,500,000. Each Unit consists 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, 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 $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.
10
<PAGE>
H. OTHER ARRANGEMENTS
On May 1, 1997, the Company entered into an agreement whereby it became a
minority owner of uPACS LLC, a limited liability company (the "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. 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 the
Company will pay 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
profitably or that the funds under the LLC will be sufficient for the
further development and marketing of uPACS.
11
<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, and comprehensive software solutions for the
pharmaceutical medical device manufacturing industries and precision electronic
systems for the defense industry. 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-Registered Trademark-, a computerized Manufacturing Execution System
("MES") used to automate, monitor, control and document highly regulated
manufacturing processes.
PHARMASYST-Registered Trademark- operates on a PC-based system in an open
client / server environment and can be readily integrated with industry standard
server database engines. PHARMASYST-Registered Trademark- is designed and
marketed as a standard application, not a custom solution or toolkit, for
implementation into a customer's existing manufacturing facility.
PHARMASYST-Registered Trademark- 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-Registered Trademark- is a 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
maintain 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-Registered Trademark- 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, Peat Marwick KPMG, QAD, a
manufacturer of MRP (Manufacturing Resource Planning) software, Euriware, an
integrator located in France and, most recently, Wonderware, a leading provider
of manufacturing software. The Company has not yet been able to use these
relationships to produce sales and cannot predict if or when such relationships
will prove successful. The Company must complete further development work on
PHARM2-TM-, which is an advanced version of the PHARMASYST-Registered Trademark-
product, and must successfully conduct training of its partners to make such
relationships effective. No assurance can be given that this will occur.*
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 a component of the SLAM ER missile
system was awarded to the Company in October, 1996. These contracts are subject
to government budget allocations. Recent budget decisions reduced funds
available for potential long term F-18 procurement and reduced the Company's
opportunities for future business.
12
<PAGE>
RESULTS OF OPERATIONS
Commercial Operations-During 1996 the Company focused on the development of
PHARM2-TM-, an advanced version of the PHARMASYST-Registered Trademark- product
introduced in 1995. At the end of the 1997 third quarter 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 Abbott
Hospital Products, Pfizer International Products Group, SmithKline Beecham,
Pharmacia & Upjohn, 3M, Novo Nordisk, Taisei, Berlex, and Wyeth. In the earlier
part of the year, the Company added Roche, Astra, and an additional contract
from Pharmacia & Upjohn.
Although the Company has made several deliveries of early releases of
PHARM2-TM-, other deliveries of PHARM2-TM- continue to be overdue. Although
cancellation for late deliveries may occur, the Company does not currently
anticipate the loss of material orders as a result thereof, but such failure to
make necessary deliveries could adversely affect the Company's reputation.* For
the PHARM2-TM- business to grow it is necessary for the Company to increase its
delivery rate and since the end of the second quarter the Company has increased
its development staff by approximately 40% to overcome this shortcoming.
Although required deliveries are planned no assurances can be given that they
will take place in a timely manner. One effect of further delayed deliveries
would be to negatively impact the Company's cash flow, which could limit the
Company's ability to grow.
The Company sells PHARM2-TM- through direct salespersons operating out of
its headquarters in New Jersey; St. Louis, MO, 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).* The Company requires additional sales persons to grow
and has, as of yet, not been able to find suitable candidates. Failure to add to
the staff could negatively impact revenues.
During the 1997 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 in order to be fully
compliant with the principles embodied in GAMP and the Company believes it is
currently in full compliance with such GAMP principles. 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 this provides added value to the Company's ability to sell in this
market and this should further differentiate the Company from its competition.*
The Company has also strengthened its quality assurance organization through the
employment of personnel familiar with pharmaceutical manufacturing practice.
In February 1997, the Company announced the validation of the Dispensing
module of PHARMASYST-Registered Trademark- at the Canadian manufacturing
facility of a major pharmaceutical company, one of the Company's principal
clients. The Company believes that the value of validation will be realized in
increased acceptance of the Company's products by other pharmaceutical
companies.* Although the Company generates certain revenue upon delivery of
PHARM2-TM- 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 for a major pharmaceutical
company manufacturing medical devices using the PHARMASYST-Registered Trademark-
Electronic Batch Recording System. Although no assurances can be given, and any
such accomplishment is dependent on customer cooperation, the Company hopes to
add four to six more validated sites by January, 1998*.
During the 1997 nine month period, the Company strengthened its technical
resources through the addition of development staff in both Camberley,
England and in its New Jersey headquarters, and in its opinion must continue
to do so to meet its delivery commitments and to accommodate expected
growth.* 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.
13
<PAGE>
Defense Operations. During the 1997 nine month period 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 involved primarily technical staff and was responsible for a
major part of the income generated by the Government Technology Division in this
period. In the month of August, the Company completed the environmental
qualification of its Maintenance Data Recorder which the Company believes will
increase the sales opportunities for this product.* Development effort on the
IBU has proceeded on schedule. The development work on the SLAM ER missile is
currently behind schedule although the Company hopes to achieve recovery to
schedule within the next months.*
In addition, the Company continued its development of additional software
for the Stores Management System used aboard the Tornado aircraft. The
Tornado program extends beyond the year 2000 and could offer the Company
significant additional business.* The Company recently provided cost and
pricing information for additional production for the Tornado Stores
Management System and has recently been advised that the customer anticipates
placing an $11.4 million order before the end of 1997*. The award of this
contract is dependent on, among other factors, the defense budget of the
German government. Efforts to secure the released funds for this contract
have been unsuccessful in the past due to budget allocations for other
priorities and there currently can be no assurance of the award of such
contract.
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.
Nine Months ended July 31,1997 compared with 1996. Total revenues
decreased by $0.6 million or 5.7 %, from $10.5 million in the nine months
ended July 31,1996 to $9.9 million in the same period in 1997. Revenues from
Defense operations decreased by $1.6 million or 16.3 %, to $8.2 million for
the nine months ended July 31,1997 compared with revenues of $9.8 million in
the same period in 1996. Commercial revenues increased by $0.4 million or
36.4% from $1.1 million in the nine months ended July 31, 1996 to $1.5
million in the same period in 1997.
The decline in Defense revenues was due in part to lower order writing
caused by delays in government funding, administrative delays in issuing
contracts and reduced contract values due to competitive pressures.
The increase in commercial revenues primarily resulted from deliveries of
early releases of standard versions of PHARM2-TM- as well as the completion
of certain portions of enhancements on the percentage completion method. The
PHARM2-TM- development effort is no longer being capitalized since initial
deliveries have taken place and all further enhancements to the functionality
of the basic product are being expensed, which negatively impacts earnings.
The Company incurred a net loss of $7.2 million in the nine months ended
July 31,1997 compared with a loss of $7.9 million in the comparable period in
1996. The loss in 1997 was due to reduced order bookings in the Government
Technology Division resulting in lower revenues without a corresponding
decrease in overhead or selling, general, and administrative costs. In
addition, the development contracts which the Company has accepted in
anticipation of future production were bid aggressively and have a high cost
relative to realized revenue. These contracts will not be complete until 1998
and the effect of this aggressive bidding will continue to affect revenues.
The effect on earnings is a function of what additional revenues the Company
can develop from other contracts yet to be booked. There was not sufficient
revenue developed by the Medical Technology Division to offset the continuing
marketing and sales costs as well as the additional administrative costs
necessary to support the development process. The loss in the nine months
ending July 31, 1997 was also due to interest expense of $1.1 million and
amortization of capitalized software of $1.1 million, compared to $0.3
million and $0.8 million respectively for the 1996 period. Interest in
succeeding periods will increase further due to interest on the $5.5 million
of Convertible Debentures since only two months of interest charges were
incurred in the third quarter of 1997.
The loss in the 1996 nine month period was also due in large part to the
write-off of $2.4 million of capitalized software.
14
<PAGE>
The Company expects to incur additional operating losses in the 1997
fourth quarter and the first quartered fiscal 1998, and could be expected to
incur further losses in succeeding quarters, particularly if currently
anticipated orders do not materialize in the amounts required on a timely
basis, or if the Company does not complete its current orders on schedule.*
While the Company is actively making proposals to its customers for new
business, the Company has no ability to control government funding or
budgeting processes; and is subject to unpredictable timing of capital
authorizations required by its customers to purchase its PHARM2-TM- products.
The Company intends to add to its sales capability so as to increase the
number of selling opportunities in an effort to reduce the effect of funding
and contract placement delays.*
The Company is reviewing alternatives to overcome the losses in the
Government Technology Division taking into account the difficulty in writing new
business on a timely basis.
Cost of sales increased by $0.6 million from $7.7 million or 73.1% of
revenues in the nine months ended July 31, 1996 compared to $8.3 million or
83.8% of revenues in the nine months ended July 31, 1997. The cost of sales in
the 1997 period increased relative to revenues due primarily to increases in
direct and contract labor and the increase in overhead salaries. In the nine
months ended July 31, 1997 the direct labor cost was $4.4 or 44.4% of revenues
compared with a direct and contract labor cost of $3.0 million or 28.6% of
revenues in the nine months ended July, 1996. In the nine months ended July 31,
1997 the overhead salaries were $2.5 million or 25% of revenues compared with
$1.6 million or 15.2% of revenues in the comparable period in 1996. Although the
cost of direct and contract labor and overhead salaries were greater in the
period ending July 31, 1997 compared with the same period in 1996; the increase
in capitalized software in 1997 was $3.5 million compared to $2.3 million in the
comparable period in 1996 thus reducing the effect of the increase in labor and
overhead. Since the design of PHARM2-TM- was essentially completed in the period
ending April 30,1997, capitalization in the three months ending July 31, 1997,
and in future periods, will be substantially reduced thus having an adverse
effect on the future cost of sales. Such an adverse effect can only be overcome
by an increase in revenues through deliveries of PHARM2-TM- and associated
customization income.* The cost of sales was reduced by the difference in
purchased material due primarily to the reduced sales of the Government
Technology Division. In the nine months ending July 31, 1997 purchases amounted
to $1.5 million compared with $2.0 million in the nine months ending July 31,
1996.
Selling, general and administrative expenses increased by $0.2 million, from
$7.1 million or 67.6% of revenues in the nine months ending July 31, 1996 to
$7.2 million or 72.7% of revenues in the nine months ended July 31, 1997. The
increase was due, in part, to an increase of $0.3 million in amortization costs
of capitalized software for the Medical Technology Division. The cost of
amortization in the nine months ended July 31, 1996 was $.8 million and in the
nine months ended July 31, 1997 the cost of amortization was $1.1 million.
Professional fees in the nine months ending July 31, 1996 were $0.8 million
burdened by the cost of preparing a registration statement for the sale of
securities which was later withdrawn. Professional fees in the nine months
ending July 31, 1997 were $0.3 million. Selling salaries in the nine month
period ending July 31, 1997 were $1.0 million compared with $0.6 million in the
comparable period in 1996. Costs of consulting, advertising, G&A salaries, Group
Life Insurance, and personnel hiring were all higher in the nine months ended
July 31, 1997 than in the comparable period in 1996. Miscellaneous
G&A costs were greater in the nine months ended July 31, 1996 than in the
comparable period in 1997 by $0.5 million.
Research and development expenses declined from $0.8 million in the nine
months ended July 31, 1996 to $0.5 million in the nine months ended July 31,
1997 due to a reduction of engineering investment in new product design for the
Government Technology Division.
Three Months ended July 31, 1997 compared with the three months ended July
31, 1996. Revenues in the three month period ended July 31, 1997 were $3.6
million compared with $3.0 million in the three months ended July 31, 1996. The
increase in revenues was due primarily to increased commercial revenues from
$0.0 million in the three months ended July 31,1996 to $0.9 million in the three
months ended July 31, 1997. Defense revenues during the three months ended July
31, 1997 declined to $2.7 million from $3.1 million in the three months ended
July 31, 1996.
15
<PAGE>
The Company had a net loss of $2.8 million in the three months ended July
31, 1997 compared with a net loss of $2.5 million in the three months ended July
31, 1996.
The loss in each of the three month periods were affected by Medical
Technology Division costs of marketing and selling as well as the administrative
costs necessary to support the development of new products including PHARM2-TM-.
These costs were not offset by sufficient revenue to prevent a loss and are
expected to continue for at least the fourth quarter of 1997 and could continue
into subsequent quarters in the absence of adequate revenues from delivery of
PHARM2-TM- and the accompanying customization revenues which are accounted for
on the percentage of completion method.
The capitalized costs in the three months ending July 31, 1997 were $0.6
million compared with $1.0 million in the comparable period in 1996. The
reduction in capitalized costs represent an increase in expense with adverse
effects on earnings ( See discussion above regarding results of the nine month
period ending July 31, 1997).
The loss in the 1997 three month period was also affected by interest costs
of $0.4 million compared with interest costs of $0.1 million in the 1996 three
month period. The increase in interest was due to the interest paid on the $10
million Convertible Debentures which the Company sold in 1996 and two months
interest on the $5.5 million Convertible Debentures sold in May, 1997.
The cost of sales in the three months ended July 31, 1997 was $3.4 million
or 94.3% of revenues compared with a cost of sales of $2.5 million or 82.1% in
the comparable period in 1996. The difference in the cost of sales was due in
part to the effect of reduced capitalization in the period ending July 31, 1997
compared with the period ending July 31, 1996. The cost of direct and contract
labor in the Medical Technology Division in the period ending July 31, 1997 was
greater than in the period ending July 31, 1996 and the overhead expense in 1997
was greater than in 1996 due to further investment in the development of
PHARM2-TM-. The decrease in capitalized software in the 1997 three month period
compared to the comparable 1996 period, increased the effect of the increases in
labor and overhead. Since the design of PHARM2-TM- was essentially completed in
the period ending April 30, 1997, future capitalization will be substantially
reduced thus having an adverse effect on the future cost of sales. Such an
adverse effect can only be overcome by an increase in revenues through potential
deliveries of PHARM2-TM- and associated customization income.
Selling, general and administrative expenses in the three month period
ending July 31, 1997 were $2.0 million or 55.5% of revenues compared with $2.4
million or 79,8% of revenues in the corresponding period in 1996. The principal
differences in cost included higher amortization and salary expenses in the
three months ending July 31, 1997 and increased professional fees and
shareholder expense in the three months ended July 31, 1996.
Research and development costs decreased to $0.1 million in the three month
period ending July 31, 1997 compared to $0.2 million in the three months ending
July 31, 1996 due to reduced investment in new engineering designs.
LIQUIDITY
During the nine months ended July 31, 1997, the Company had a net reduction
of cash of $3.7 million. The use of cash for operations was due primarily to the
Company's expenditure of approximately $2.4 million net of amortization for the
development of its PHARMASYST-Registered Trademark- products and the Company's
net loss of $7.2 million for the nine months. Cash used in investing activities
during the third quarter of $0.5 million was due primarily to the purchase of
property, plant and equipment. Net cash provided from financing activities was
attributable to the exercise of options and warrants for the purchase of the
Company's common stock as well the proceeds from the issuance of the Company's
$5.5 million Convertible Debentures. The combined use of cash from all
activities during the quarter was $3.7 million. At July 31, 1997 the Company's
cash and billed receivables were $6.8 million.
16
<PAGE>
The Company has 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 an agreement whereby it became a
minority owner of UPACs LLC, a limited liability company (the OLLCO). Under the
terms of the agreement, the Company made a capital contribution to the LLC of
its rights to its uPACS-TM-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 approximately 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 the Company will pay 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 profitably or that
the funds under the LLC will be sufficient for the further development and
marketing of uPACS. The Company cannot predict if or when uPACS sales will
commence in its updated versions. There is intense competition in this market
and the Company has not established its market position. The Company anticipates
difficulty in achieving such sales until further product development is complete
and market tested.
On May 30, 1997, the Company sold 55 units ("Units") at $100,000 per
Unit, for an aggregate of $5,500,000, 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,
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
$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.
The Company believes that cash generated by operations and existing capital
resources in combination with its credit facility, the funds available from the
LLC, and the net proceeds from the sale of the Convertible Debentures and
anticipated collections on its outstanding receivable will be sufficient to fund
its operations through fiscal year end 1997.
17
<PAGE>
In July, 1997 the Company entered into an engagement with Cowen &
Company, an investment banker, to act as the Company's financial advisor. The
Company intends to use this relationship to develop additional capital for
use during 1998. The Company is also relying on receiving anticipated orders
for its products. In addition, the Company is relying on the continued
successful enhancement of its Medical Technology Division leading product,
PHARM2-TM-, during the fourth quarter of calendar 1997 to stimulate new
orders and permit the delivery of existing orders. However, neither the
completion of PHARM2-TM- nor the resulting generation of cash from orders can
be assured either in time or amount or that such amounts will be sufficient
for the Company's needs. If the Company should not receive such additional
capital funding for fiscal 1998, or should the Company not receive the
anticipated orders in time and in the amounts planned during fiscal 1998 the
Company would need to reduce its operating costs. The effect of these
reductions could have an adverse affect on the Company's ability to market,
develop, and implement its products with the result that the Company's losses
could continue or increase.*
*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", "will", "should" 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.
Reference is made to the Company's most recent S-3 filing on August 22, 1997
for a summary of risks applying to the Company's business.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits--(27) Financial Data Schedule (Edgar filing only.)
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on June 9, 1997
relating to a private placement whereby the Company sold $5.5 million
of its 8% convertible debentures and 99,000 Stock Purchase Warrants.
From December 16, 1997 until February 23, 1998, one-half of the
Convertible Debentures may be converted and after February 23, 1998,
the Convertible Debenture 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 filed a Current Report on Form 8-K on June 13, 1997
relating to an Operating Agreement whereby the Company became a
minority owner of a limited liability Company whose purpose is to
accelerate the development of its product uPACS. Initial amount of
the funding is $3 million.
19
<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: SEPTEMBER 15, 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
(Principal Financial Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
Form 10-Q for the quarter ended July 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-1-1997
<PERIOD-END> JUL-31-1997
<CASH> 3,771,00
<SECURITIES> 0
<RECEIVABLES> 7,181,000
<ALLOWANCES> 0
<INVENTORY> 3,868,000
<CURRENT-ASSETS> 15,549,000
<PP&E> 5,209,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 29,522,000
<CURRENT-LIABILITIES> 4,792,000
<BONDS> 0
0
0
<COMMON> 7,942,000
<OTHER-SE> (2,425,000)
<TOTAL-LIABILITY-AND-EQUITY> 29,522,000
<SALES> 9,808,000
<TOTAL-REVENUES> 9,941,000
<CGS> 8,322,000
<TOTAL-COSTS> 17,186,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,245,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,245,000)
<EPS-PRIMARY> (.92)
<EPS-DILUTED> 0
</TABLE>
