-----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, Cp75DTkWeNuam55uPO1jsf4NclKkeHXao9wT967keGW/FikIda2oFgBxEaF/5UA9 RM0FTs4L/5H2OA1QWEgjWg== 0000912057-97-030784.txt : 19970918 0000912057-97-030784.hdr.sgml : 19970918 ACCESSION NUMBER: 0000912057-97-030784 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970731 FILED AS OF DATE: 19970915 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 SEC ACT: SEC FILE NUMBER: 000-07100 FILM NUMBER: 97680499 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 1 FORM 10-Q - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 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 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 BASE TEN SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine Months Ended Three Months Ended ----------------- ------------------ July 31 July 31 ------- ------- 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
See Notes To Consolidated Financial Statements 2 BASE TEN SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY NINE MONTHS ENDED JULY 31, 1997 (Unaudited)
EQUITY COMMON STOCK ADJUSTMENT ------------------------------------------------ FROM CLASS A CLASS B ADDITIONAL FOREIGN ------- ------- PAID-IN CURRENCY SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TRANSLATION ----------- ------------ --------- ---------- ------------- -------------- ----------- 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) ----------- ------------ --------- ---------- ------------- -------------- ----------- ----------- ------------ --------- ---------- ------------- -------------- -----------
SEE NOTES TO CONSOLIDATED STATEMENTS 3 BASE TEN SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED JULY 31, ---------------------------- 1997 1996 ------------- ------------- 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) ------------- ------------- 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 ------------- -------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 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 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. 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 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 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.
JULY 31, 1997 OCTOBER 31, 1996 ----------------- ------------------- 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 ------------ ------------- ------------ -------------
8 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:
JULY 31, 1997 OCTOBER 31,996 ------------- --------------- 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 ------------- --------------- ------------- ---------------
E. OTHER ASSETS:
JULY 31, 1997 OCTOBER 31, 1996 ------------- ---------------- 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 ------------ --------------- ------------ ---------------
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 The Company's future minimum lease payments related to the sale-leaseback arrangement in effect at July 31, 1997 are as follows:
FISCAL ------ 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 ------------ ------------
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 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 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 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 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 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 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 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 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 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 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 EX-27 2 EXHIBIT 27
5 Form 10-Q for the quarter ended July 31, 1997. 9-MOS OCT-31-1997 NOV-1-1997 JUL-31-1997 3,771,00 0 7,181,000 0 3,868,000 15,549,000 5,209,000 0 29,522,000 4,792,000 0 0 0 7,942,000 (2,425,000) 29,522,000 9,808,000 9,941,000 8,322,000 17,186,000 0 0 0 0 0 (7,245,000) 0 0 0 (7,245,000) (.92) 0
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