-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A+wlYb2LbUAN6C/rZ92QLb3ZnQmCO8JXzmw/iN14it6qMUivP+kTNIut4Ul27kFe ZkcuPkM/a9A2yIS4rgqfFg== 0000912057-97-020046.txt : 19970612 0000912057-97-020046.hdr.sgml : 19970612 ACCESSION NUMBER: 0000912057-97-020046 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970131 FILED AS OF DATE: 19970611 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BASE TEN SYSTEMS INC CENTRAL INDEX KEY: 0000010242 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 221804206 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-07100 FILM NUMBER: 97622289 BUSINESS ADDRESS: STREET 1: ONE ELECTRONICS DR CITY: TRENTON STATE: NJ ZIP: 08619 BUSINESS PHONE: 6095867010 MAIL ADDRESS: STREET 1: ONE ELECTRONICS DR CITY: TRENTON STATE: NJ ZIP: 08619 10-Q/A 1 FORM 10-Q/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended January 31, 1997 Commission File No. 0-7100 BASE TEN SYSTEMS, INC. (Exact name of registrant as specified in its charter) New Jersey 22-1804206 (State of incorporation) (I.R.S. Employer Identification No.) One Electronics Drive Trenton, N.J. 08619 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (609) 586-7010 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES /x/ NO /_/ Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Title of Class Outstanding at March 11, 1997 Class A Common Stock, $1.00 par value 7,365,317 Class B Common Stock, $1.00 par value 445,121 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- BASE TEN SYSTEMS, INC. AND SUBSIDIARIES INDEX
PART I. FINANCIAL INFORMATION PAGE Consolidated Balance Sheets -- January 31, 1997 (as Restated) (unaudited) and October 31, 1996 (as Restated) (audited)..................................... 1 Consolidated Statements of Operations -- Three months ended January 31, 1997 and 1996 (unaudited)............................................ 2 Consolidated Statements of Shareholders' Equity -- Three months ended January 31, 1997 (as Restated) (unaudited)........................... 3 Consolidated Statements of Cash Flows -- Three months ended January 31, 1997 and 1996 (unaudited)............................................ 4 Notes to Consolidated Financial Statements....................................... 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................... 10 PART II. OTHER INFORMATION Item 2: Changes in Securities............................................... 14 Item 6: Exhibits and Reports on Form 8-K.................................... 14
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS January 31, 1997 October 31, 1996 (Unaudited) (Audited) --------- ------- CURRENT ASSETS: (As Restated, See Note G) ----------------------- 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 (convertible into 445,000 445,000 Class A Common Stock on a one for one basis) Additional paid-in capital............................................... 25,120,000 25,086,000 Deficit.................................................................. (22,635,000) (20,640,000) -------------- -------------- 10,295,000 12,250,000 Equity adjustment from foreign currency translation...................... (138,000) (159,000) -------------- -------------- 10,157,000 12,091,000 -------------- -------------- $ 28,469,000 $ 30,348,000 -------------- -------------- -------------- --------------
See Notes to Consolidated Financial Statements 1 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
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY THREE MONTHS ENDED JANUARY 31, 1997 (Unaudited) Equity Adjustment Common Stock From ---------------------------------------- Additional Foreign Class A Class B Paid-in Currency ------- ------- Shares Amount Shares Amount Capital Deficit Translation ------ ------ ------ ------ ------- ------- ----------- Balance - October 31, 1996 (as Restated, See Note G) 7,358,964 $7,359,000 445,387 $ 445,000 $25,086,000 $(20,640,000) $ (159,000) Conversions of Class B Common to Class A Common 266 -- (266) -- -- -- -- Issuance of Common Stock 6,087 6,000 -- -- 34,000 -- -- Foreign currency translation -- -- -- -- -- -- 21,000 Net loss -- -- -- -- -- (1,995,000) -- --------- --------- ------- -------- ---------- ----------- --------- Balance - January 31, 1997 (as Restated, See Note G) 7,365,317 $7,365,000 445,121 $ 445,000 $25,120,000 $(22,635,000) $(138,000) --------- ---------- ------- -------- ---------- ----------- --------- --------- ---------- ------- -------- ---------- ----------- ---------
See Notes to Consolidated Financial Statements 3 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 (207,000) (323,000) Decrease in Long-Term Lease Obligation - net of current portion (10,000) (12,000) ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (217,000) (335,000) ------------ ------------ CASH FLOWS PROVIDED FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 40,000 244,000 ------------ ------------ NET CASH PROVIDED FROM FINANCING ACTIVITIES 40,000 244,000 Effect of exchange rate change on cash (81,000) (83,000) ------------ ------------ NET DECREASE IN CASH (2,192,000) (3,577,000) CASH, beginning of period 7,465,000 7,218,000 ------------ ------------ CASH, end of period $ 5,273,000 $ 3,641,000 ------------ ------------ ------------ ------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 130,000 $ 130,000 ------------ ------------ ------------ ------------
See Notes to Consolidated Financial Statements 4 BASE TEN SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED JANUARY 31, 1997 (Unaudited) A. DESCRIPTION OF BUSINESS Base Ten Systems, Inc. (OBase TenO or the OCompanyO) is engaged in the design and manufacture of electronic systems employing safety critical software for defense markets and the development of commercial applications focused on manufacturing execution systems, medical screening and image processing software. The Company also manufactures defense products to specifications for prime government contractors and designs and builds proprietary electronic systems for use in secure communications by various U.S. government agencies. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: 1. In management's opinion, all adjustments necessary for a fair presentation of the financial statements are reflected in the accompanying statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The consolidated interim financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K/A for the fiscal year ended October 31, 1996. The results of operations for the quarter ended January 31, 1997 are not necessarily indicative of the operating results for the full year. 2. BASIS OF PRESENTATION - The Company's consolidated financial statements have been prepared on a historical cost basis. 3. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Base Ten. All significant intercompany accounts, transactions and profits have been eliminated. 4. REVENUE RECOGNITION - For Medical Software Products, the Company evaluates each product and order on an individual basis to determine the proper revenue recognition method. Contracts to deliver software which require significant customization or modification for an extended period of time are accounted for under the percentage of completion method. For the products or orders which are more standardized in nature, revenue is recognized on delivery. For products in the Government Technology Division earnings on long-term contracts are recognized on the percentage-of-completion or unit-of-delivery basis. Changes in estimates are accounted for using the cumulative catch up method and are immaterial in each period presented. On contracts where the percentage-of-completion method is used, costs and estimated earnings in excess of progress billings are presented as unbilled receivables. Unbilled costs of unit-of-delivery contracts are included in inventory. Payments received in excess of costs incurred on long-term contracts are recorded as customers' advance payments, which are included as a reduction of inventory on the balance sheet. 5. INVENTORIES - Inventories are stated at the lower of cost (first-in, first-out method) or market. 5 Inventoried costs on contracts include direct material, labor and applicable overhead. In accordance with industry practice, inventoried costs include amounts relating to contracts with a long production cycle, some of which are not expected to be realized within one year. 6. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are carried at cost and depreciated over estimated useful lives, principally on the straight-line method. The estimated useful lives used for the determination of depreciation and amortization are: Leased asset - building 15 years Machinery and equipment 3 to 10 years Furniture and fixtures 3 to 20 years 7. OTHER ASSETS - Included in other non-current assets are software development costs capitalized in accordance with Statement of Financial Accounting Standard No. 86, "Accounting for Costs for Computer Software to be Sold, Leased or Otherwise Marketed" issued by the Financial Accounting Standards Board, the Company is required to capitalize certain software development and production costs once technological feasibility has been achieved. The cost of purchased software is capitalized when related to a product which has achieved technological feasibility or that has an alternative future use. The Company performs quarterly reviews of the recoverability of its capitalized software costs and other long lived assets based on anticipated revenues and cash flows from sales of these products. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows at the rate the Company utilizes to evaluate potential investments. The Company estimates fair value based on the best information available making whatever estimates, judgments and projections are considered necessary. 8. CASH AND CASH EQUIVALENTS - The Company considers all investments with a maturity of three months or less at date of acquisition to be cash equivalents. 9. INCOME TAXES - Effective November 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), which requires a change from the deferred method's income statement approach of accounting for income taxes to an asset and liability approach of accounting for income taxes. Under the asset and liability approach, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. This change has not had any effect on the Company's Consolidated Statement of Operations. 10. RECENTLY ISSUED ACCOUNTING STANDARD - In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," which requires adoption of the disclosure provisions no later than fiscal years beginning after December 15, 1995 and adoption of the recognition and measurement provisions for nonemployee transactions no later than after December 15, 1995. The new standard defines a fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Pursuant to the new standard, companies are encouraged, but are not required, to adopt the fair value method of accounting for employee stock-based transactions. Companies are also permitted to continue to account for such transactions under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," but 6 would be required to disclose in a note to the financial statements pro forma net income and, if presented, earnings per share as if the Company had applied the new method of accounting for all grants after November 1, 1995. The accounting requirements of the new method are effective for all employee awards granted after the beginning of the fiscal year of adoption. The Company has not yet determined if it will elect to change to the fair value method, nor has it determined the effect the new standard will have on net income and earnings per share should it elect to make such a change. Adoption of the new standard will have no effect on the Company's cash flows. 11. NET LOSS PER SHARE - Earnings per share for periods ended January 31, 1997 and 1996 were calculated using the number of weighted average common shares outstanding. Stock options, warrants and rights would have an anti-dilutive effect on earnings per share for the periods included. 12. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair market value of certain financial instruments, including cash, accounts receivable, accounts payable, and other accrued liabilities, approximate the amount recorded in the balance sheet because of the relatively current maturities of these financial instruments. The fair market value of long term debt at January 31, 1997 and October 31, 1996 approximates the amounts recorded in the balance sheet based on information available to the Company with respect to interest rates and terms for similar financial instruments. 14. FOREIGN CURRENCY TRANSLATION - The accounts of the consolidated foreign subsidiaries are translated into United States dollars in accordance with Financial Accounting Standards Board (FASB) Statement No. 52. Transaction gains and losses are immaterial. 7 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 F. LONG-TERM CAPITAL LEASE: LEASES. The Company entered into a sale and leaseback arrangement on October 28, 1994. Under the arrangement, the Company sold its main building in Trenton, New Jersey and agreed to lease it back for a period of 15 years under terms that qualify the arrangement as a capital lease. The buyer/lessor of the building was a partnership. Two of the partners are officers and directors of the Company. In addition, a non-interest bearing security deposit of $550,000 was paid at closing and included in other non-current assets on the balance sheet. Interest is calculated under the effective interest method and depreciation will be taken using the straight line method over the term of the lease. The Company's future minimum lease payments related to the sale-leaseback arrangement in effect at January 31, 1997 are as follows: Fiscal ------ 1997 $ 560,000 1998 560,000 1999 560,000 2000 615,000 2001 615,000 2002 5,354,000 ---------- 8,264,000 Less: Interest portion (4,749,000) ---------- Present value of net minimum payments $ 3,515,000 ---------- ---------- G. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS The Company has restated its consolidated financial statements for the years ended October 31, 1996 and 1995. Subsequent to the issuance of the Company's 1996 consolidated financial statements, the Company's management determined that certain temporary salary reductions for certain officers of the Company during fiscal 1995, and loans made to such officers to be repaid by future bonuses, should have been recorded as an increase to compensation expense with a corresponding increase to additional paid-in-capital in the Company's 1995 consolidated financial statements. As a result, the Company's 1996 and 1995 consolidated financial statements have been restated from the amounts previously reported to record these loans as a charge to operations and as an increase to additional paid-in-capital in fiscal 1995. The impact of these adjustments was to increase the previously reported 1995 net loss by $502,000 and net loss per common share by $.07. The restatement had no effect on the Company's cash position. 9 A summary of the significant effects of the restatement is as follows (dollar amounts in thousands, except per share data):
----------------------------------------------------------------------------------------- AS AS PREVIOUSLY RESTATED REPORTED ----------------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 1995: Selling, general and administrative expense $ 5,796 $ 6,298 Total operating expenses 19,656 20,158 Loss before income tax benefit (1,349) (1,851) Net loss (875) (1,377) Net loss per common share (.13) (.20) ----------------------------------------------------------------------------------------- AT OCTOBER 31, 1995: Additional paid-in capital $ 23,908 $ 24,410 Accumulated deficit (11,179) (11,681) ----------------------------------------------------------------------------------------- AT OCTOBER 31, 1996: Additional paid-in capital $ 24,584 $ 25,086 Accumulated deficit (21,142) (20,640) ----------------------------------------------------------------------------------------- AT JANUARY 31, 1997: Additional paid-in capital $ 24,618 $ 25,120 Accumulated deficit (22,133) (22,635)
H. SUBSEQUENT EVENT On May 30, 1997, the Company sold 55 units at $100,000 per unit, for an aggregate of $5,500,000, to 3 non-U.S. resident, accredited purchasers in a private offering. Each unit consisted of (i) a convertible debenture in the principal amount of $100,000 convertible into shares of the Company's Class A Common Stock, $1.00 par value, and (ii) a warrant to acquire 1,800 shares of Class A Common Stock. The number of shares of Class A Common Stock issuable upon conversion of the Convertible Debentures is variable and will be calculated at the time of conversion based upon the market price of the Class A Common Stock contemporaneously with the conversion. The Convertible Debentures are not convertible prior to December 16, 1997. From December 16, 1997 until February 23, 1998, one-half of the Convertible Debentures may be converted at a discount of ninety-five percent. After February 23, 1998, the Convertible Debentures are fully convertible and may be converted at a discount of ninety-two percent. The Warrants may be exercised at any time prior to 5:00 P.M. on May 30, 2002 at an exercise price of $12.26 per share. The Company received net proceeds of approximately $4,950,000 from the sale of the Units after deduction of fees and expenses related to the private offering. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL. Base Ten Systems, Inc. (the "Company") operates with a Medical Technology Division and a Government Technology Division and designs, develops, manufactures and markets complex, precision electronic systems for the defense industry and comprehensive software solutions for the pharmaceutical and medical device manufacturing industries. The Company's products are used in safety critical applications requiring consistent, highly reliable outcomes where an out-of-specification event could have a catastrophic result. The Company developed a core competency in safety critical applications from its historical focus on designing electronic systems used primarily in weapons management systems for military aircraft. The Company has applied this expertise to develop PHARMASYST(R), a computerized Manufacturing Execution System ("MES") used to automate, monitor, control and document highly regulated manufacturing processes. PHARMASYST operates on a PC-based system in an open client / server environment and can be readily integrated with industry standard server database engines. PHARMASYST is designed and marketed as a standard application, not a custom solution or toolkit, for implementation into a customer's existing manufacturing facility. PHARMASYST acts as an electronic monitor ensuring that the production process complies with a predefined set of specifications in order to produce a consistent product. The Company believes that PHARMASYST is the premier commercially available PC-based standardized MES solution capable of the necessary functionality and supporting documentation suitable for regulated manufacturing in the pharmaceutical and medical device industries. The Company is engaged in a continuing program to reach compliance with an industry generated standard for Good Automated Manufacturing Practice (GAMP) as a means of differentiating itself from present and future competition. The Company has entered into collaborative relationships with certain computer system integrators and others that can integrate PHARMASYST with the products and services they provide. The Company has established a relationship with STG-Coopers & Lybrand Consulting AG, Walsh Automation, a Canadian systems integrator, WTI Systems Ltd, an English Systems Integrator, Toyo Engineering Co., a Japanese developer of turnkey manufacturing facilities, Bailey Controls Company, a provider of distributed control systems, Intellution, Inc., a supplier of manufacturing systems for the pharmaceutical industry, the Taisei Corporation, a $15 billion construction and engineering company in Japan, and most recently with Peat Marwick KPMG. The Company develops and manufactures weapons management systems and other defense-related products. Currently, the Company has ongoing development contracts with McDonnell Douglas Helicopter Systems, McDonnell Douglas Aerospace, Daimler-Benz AG, Aerospace, and the U.S. Air Force. Most of these contracts relate to upgrading weapons systems for existing aircraft fleets. In 1996 the Company entered into a program with McDonnell Douglas Helicopter Systems to develop helicopter Maintenance Data Recorders. In addition, the Company entered into a contract with McDonnell Douglas Aerospace for an Interference Blanker Unit used aboard the F-18. A contract for the completion of the product design and early production for components of the SLAM ER missile system was awarded to the Company in October, 1996. RESULTS OF OPERATIONS NONDEFENSE OPERATIONS- During 1996 the Company focused on the development of PHARM2, an advanced version of the PHARMASYST product introduced in 1995. At the end of the year the Company had contracts or signed License Agreements for installation at a total of 32 sites from a total of eighteen manufacturers or their integrators including Abbot Hospital Products, Pfizer International Products Group, SmithKline Beecham, Pharmacia & Upjohn, 3M, Novo Nordisk, Taisei, Berlex, and Wyeth. More recently the Company has added Roche, Astra, and an additional contract from Pharmacia & Upjohn. 11 Although the Company has made delivery of the first release of PHARM2, other deliveries of PHARM2 are overdue. Although cancellation for late deliveries may occur, the Company does not anticipate the loss of material orders as a result thereof. The Company sells PHARM2 through direct salespersons operating out of its headquarters in New Jersey; Laguna Niguel, California; Camberley, England; Brussels, Belgium; Copenhagen, Denmark; and Tokyo, Japan. The Tokyo office was opened in January, 1997 in response to opportunities under development in the Pacific Rim. In addition to direct selling, the Company has developed relationships with implementers and integrators already active in this market to increase the number of opportunities available to it to demonstrate and offer its products (See "General" above).* During the first quarter the Company engaged an internationally recognized consulting organization to assist it in the further development and refinement of procedures and documentation for the Company to be fully compliant with the principles embodied in GAMP. GAMP is the output of an industry group defining the methodology for creation of software products for the pharmaceutical industry. Although no assurances can be given, the Company believes that completion of this effort will provide significant added value to the Company's ability to sell in this market since it will further differentiate the Company from its competition.* The Company has strengthened its Quality Assurance organization through the employment of personnel familiar with pharmaceutical manufacturing practice. The Company recently announced the validation of PHARMASYST at the Canadian manufacturing facility of a major pharmaceutical company and one of the Company's principal clients. The value of validation will be realized in the increased acceptance of the Company's products by other pharmaceutical companies.* Although the Company generates revenue and cash upon delivery of PHARM2 to its clients, it is necessary for a pharmaceutical company to validate its equipment and processes in order to satisfy FDA regulations and PHARM2 is a critical portion of the manufacturing activity. The Company announced its first validated site in October, 1996. During the period, the Company strengthened its technical resources through the addition of development staff in both Camberley, England and in its New Jersey headquarters. The Company considers its technical staff to be a primary resource and crucial to its continuance in this business area. Loss of any portion of its technical resources would be injurious and loss of a significant portion of its technical staff could cause serious and immediate damage to the Company's business. The Company believes it has good relations with its technical staff. DEFENSE OPERATIONS. During the first quarter the Company concentrated on the development tasks related to the Interference Blanker Unit (IBU) awarded to the Company in mid-1996, the development tasks related to the Maintenance Data Recorder also awarded to the Company in mid 1996, and the development tasks related to the SLAM ER missile contract awarded in October, 1996. This activity engaged primarily technical staff and was responsible for the major part of the income generated by the Government Technology Division. In addition, the Company continued its development of additional software for the Tornado program, the Company's most successful product. The Tornado program extends beyond the year 2000 and could offer the Company significant additional business.* The Company has been asked to provide cost and pricing information for additional production for the Tornado Stores Management System. This contract, if awarded, could result in $10 to $12 million of new business. It is expected that this contract will be awarded in 1997, although no assurance can be provided that the Company will be a recipient of this award.* The Company continues to seek additional sources of business in the weapons control area concentrating on those opportunities where the Company's technical skills are relevant. QUARTER ENDED JANUARY 31, 1997 COMPARED WITH THE QUARTER ENDED JANUARY 31, 1996. Revenues for the current quarter were $3,346,000 compared with $3,675,000 for the first quarter of fiscal 1996. The difference in revenues resulted primarily from a decrease in revenues of the Medical Technology Division from $895,000 in 1996 to $200,000 in 1997. The decrease in revenues in 1997 12 was due to the Company's current policy of not recognizing revenue on its PHARM2 products until delivery was effected. This decrease was partially offset by an increase in revenues from the Government Technology Division. The Company recognized a net loss of $1,995,000 in the first quarter of 1997 compared with a net loss of $870,000 in the corresponding quarter in 1996. The increase in the loss is due primarily to the reduced Medical Technology revenues and the increase in interest costs. The interest increase is due to interest incurred on the $10 million Convertible Debenture sold in August, 1996. In addition, the Company had an income tax benefit of $470,000 in 1996 while none was available in 1997. Cost of sales for the first quarter of 1997 was 76.9% of revenues compared with 66.9% of revenues for the same period in 1996. The increase was due primarily to the reduced revenues from PHARMASYST products which have a significantly lower cost of sales than defense related products. Since the development costs are largely capitalized, the remaining costs of labor and overhead are relatively low compared with resulting revenue. In addition, several significant differences occurred in the 1997 first quarter compared with the 1996 first quarter related to cost of sales. In 1997 the purchased material cost declined to $287,000 compared with $764,000 in purchased material in 1996. In addition, the cost of contract labor in 1997 was $502,000 compared with $56,000 in 1996 and the cost of direct labor in 1997 was $1,210,000 compared with $798,000 in 1996. The difference in the two years resulted from a shift from a manufacturing environment in the Government Technology Division in 1996 to an engineering environment since current orders are concentrated on development rather than hardware manufacture. The increase in contract labor also resulted from the engagement of outside personnel to assist in the testing of PHARM2, a cost which was not incurred in 1996. Research and development expenses declined in the first quarter of 1997 to $161,000 from $325,000 in the comparable quarter in 1996. Since the Government Technology Division was primarily engaged in development of customer ordered products, reduced resources were available for development work at Company expense. Research and development expenses do not include the capitalized software development costs of $1,488,000 and $715,000 for the first quarter of 1997 and 1996, respectively. The Company's investment on a cash flow basis includes both of these components. Selling, general and administrative expenses remained relatively constant for the two periods although there were variations in the components of the SG&A expense. Selling salaries increased from $181,000 for the 1996 first quarter to $232,000 in 1997 and the consulting costs increased to $161,000 from $101,000 in the first quarter of 1996. Amortization of Medical Technology Division software increased in 1997 as the amount of capitalized software for PHARMASYST products increased through the prior twelve months. The Company has restated its consolidated financial statements for the years ended October 31, 1996 and 1995. Subsequent to the issuance of the Company's 1996 consolidated financial statements, the Company's management determined that certain temporary salary reductions for certain officers of the Company during fiscal 1995, and loans made to such officers to be repaid by future bonuses, should have been recorded as an increase to compensation expense with a corresponding increase to additional paid-in-capital in the Company's 1995 consolidated financial statements. As a result, the Company's 1996 and 1995 consolidated financial statements have been restated from the amounts previously reported to record these loans as a charge to operations and as an increase to additional paid-in-capital in fiscal 1995. The impact of these adjustments was to increase the previously reported 1995 net loss by $502,000 and net loss per common share by $.07. The restatement had no effect on the Company's cash position. LIQUIDITY AND CAPITAL RESOURCES During the first quarter the Company used $1.9 million of cash in its operations. The use of cash from operations was due primarily to the Company's expenditure of approximately $1.5 million for the development of its PHARMASYST products and the Company's net loss for the quarter. Cash used in investing activities during the first quarter of $.2 million was due primarily to the purchase of property, plant and equipment. Net cash provided from financing activities was attributable to the 13 exercise of options for the purchase of the Company's common stock. The combined use of cash from all activities during the quarter was $2.2 million for the reasons stated above. At January 31, 1997 the Company's cash and other liquid assets were $5.3 million. The Company recently obtained a $1 million line of credit facility with a local bank, which expires in February 1998. Interest is 1% above the bank's prime lending rate and the credit line is collateralized by accounts receivable. There currently are no amounts outstanding under the credit line. On May 1, 1997 the Company entered into a agreement whereby it became a minority owner of a limited liability corporation (LLC). Under the terms of the agreement, the Company made a capital contribution to the LLC of its rights to its uPACS technology which is a system for archiving ultrasound images with networking, communication and off-line measurement capabilities. In exchange for such capital contribution, the Company received a 9% interest in the LLC. An outside investor made a capital contribution of $2 million and agreed to make a further capital contribution of $1 million on or before December 1, 1997, in return for a 91% interest in the LLC. The Company believes that the funds available under the LLC will be sufficient to fund operations in connection with uPACS for approximatley eighteen months.* In connection with the formation of the LLC, the Company entered into a Services and License Agreement whereby the Company has agreed to complete the development of the uPACS technology and undertake to market, sell and distribute systems using the uPACS technology. The LLC will pay the Company its expenses in connection with such services and remit to the LLC royalties in connection with the sale of systems using the uPACS technology. At such time as the LLC has distributed to the outside investor an aggregate amount equal to $4.5 million of its net cash flow, the Company would become a 63% owner of the LLC and the outside investor will own a 37% interest in the LLC. There can be no assurance that uPACS will be successful or that the LLC will operate profitable or that the funds under the LLC will be sufficient for the further development and marketing of uPACS. On May 30, 1997, the Company sold 55 units ("Units") at $100,000 per Unit, for an aggregate of $5,000,000, to 2 accredited purchasers ("Purchasers") in a private offering (the "Offering"). Each Unit consisted of (i) a convertible debenture ("Convertible Debenture") in the principal amount of $100,000 convertible into shares of the Company's Class A Common Stock, $1.00 par value ("Class A Common Stock"), and (ii) a warrant ("Warrant') to acquire 1,800 shares of Class A Common Stock. The number of shares of Class A Common Stock issuable upon conversion of the Convertible Debentures is variable. The number of shares will be calculated at the time of conversion and will be the lesser of (i) the product obtained by multiplying (x) the lesser of the average of the closing bid prices for the Class A Common Stock for the (A) five or (B) thirty consecutive trading days ending on the trading day immediately preceding the date of determination by (y) a conversion percentage equal to 95% with respect to any conversions occurring prior to February 24, 1998 and 92% with respect to any conversions occurring on or after February 24, 1998 and (ii) $13.50 with respect to any conversions occurring prior to May 30, 1998 or (y) $14.00 with respect to any conversions occurring on or after May 30, 1998. The Convertible Debentures are not convertible prior to December 16, 1997. From December 16, 1997 until February 23, 1998, one-half of the Convertible Debentures may be converted and after February 23, 1998, the Convertible Debentures are fully convertible. The Warrants may be exercised at any time through May 30, 2002 at an exercise price of $12.26 per share. The Company received net proceeds of approximately $4,950,000 from the sale of the Units after deduction of fees and expenses related to the Offering. In connection with the Offering, transaction fees aggregating $293,000 were paid to Tail Wind Inc., the manager of one of the Purchasers, for services rendered in its capacity as representative of the Purchasers, and advisory fees aggregating $165,000 were paid to Strategic Growth International, Inc., the Company's financial consultant. In addition, Alexander M. Adelson, a director of the Company, received warrants to purchase 27,500 shares of Class A Common Stock at an exercise price of $10.125 per share and $55,000 for advisory services rendered in connection with the Offering. The Company believes that cash generated by operations and existing capital resources in combination with such credit facility, the funds available from the LLC, and the net proceeds of the sale of the convertible debentures, will be sufficient to fund its operations through fiscal year end 1997. In addition, the Company is relying on the continued successful development of its Medical Technology Division leading product PHARM2, during the third quarter of calendar 1997 to stimulate new orders and permit the delivery of existing orders. If the Company should not receive currently anticipated orders in time and in the amounts planned during fiscal 1997 the Company may need to reduce its operating costs. The effect of these reductions could have an adverse affect in the Company's ability to market, develop, and implement its products with the results that the Company may continue to incur losses.* *FORWARD LOOKING INFORMATION THE FOREGOING CONTAINS FORWARD LOOKING INFORMATION WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS APPEAR IN A NUMBER OF PLACES AND CAN BE IDENTIFIED BY AN "ASTERISK" REFERENCE TO A PARTICULAR SECTION OF THE FOREGOING OR BY THE USE OF SUCH FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVE", "EXPECT", "MAY", "WILLO, OSHOULDO OR THE NEGATIVE THEREOF OR VARIATIONS THEREOF. SUCH FORWARD LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THE PARTICULAR FACTORS DESCRIBED ABOVE IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS AS WELL AS THROUGHOUT THIS REPORT. IN EACH CASE ACTUAL RESULTS MAY DIFFER MATERIALLY FROM SUCH FORWARD LOOKING STATEMENTS. THE COMPANY DOES NOT UNDERTAKE TO PUBLICLY UPDATE OR REVISE ITS FORWARD LOOKING STATEMENTS EVEN IF EXPERIENCE OR FUTURE CHANGES MAKE IT CLEAR THAT ANY PROJECTED RESULTS (EXPRESSED OR IMPLIED) WILL NOT BE REALIZED. 14 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. 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: May 16, 1997 BASE TEN SYSTEMS, INC. (Registrant) By: /s/ MYLES M. KRANZLER --------------------------------- Myles M. Kranzler President and Chairman of the Board (Principal Executive Officer) By: /s/ EDWARD J. KLINSPORT ---------------------------------- Edward J. Klinsport Executive Vice President and Chief Financial Officer 16 -----END PRIVACY-ENHANCED MESSAGE-----