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, 1996 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 AUGUST 30, 1996
Class A Common Stock, $1.00 par value 7,327,968
Class B Common Stock, $1.00 par value 449,645
BASE TEN SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
Part I. Financial Information Page
Consolidated Balance Sheets -- July 31, 1996 (unaudited)
and October 31, 1995 (audited). . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations -- Three months and nine months
ended
July 31, 1996 and 1995 (unaudited). . . . . . . . . . . . . . . 2
Consolidated Statements of Shareholders' Equity -- Nine
months ended July 31, 1996 (unaudited). . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows -- Nine months ended
July 31, 1996 and 1995 (unaudited). . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements. . . . . . . . . . . . 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . 8
Part II. Other Information
Item 6: Exhibits and Reports on Form 8-K . . . . . . . . . . 14
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
AS OF AS OF
JULY 31, 1996 OCTOBER 31, 1995
------------- ----------------
(UNAUDITED) (AUDITED)
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,260,000 $ 7,221,000
Accounts receivable (including unbilled receivables of
$3,902,000 in 1996 and $3,271,000 in 1995) . . . . . . . . 5,764,000 6,034,000
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . 3,072,000 3,151,000
Current portion of employee loan receivable. . . . . . . . . 128,000 108,000
Other current assets . . . . . . . . . . . . . . . . . . . . 448,000 536,000
------------- -------------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . 10,672,000 17,050,000
PROPERTY, PLANT AND EQUIPMENT. . . . . . . . . . . . . . . . . . 4,825,000 4,480,000
EMPLOYEE LOAN RECEIVABLE . . . . . . . . . . . . . . . . . . . . 180,000 298,000
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . 5,588,000 6,177,000
------------- -------------
$ 21,265,000 $ 28,005,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES: . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . $ 1,060,000 $ 1,246,000
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . 2,421,000 1,454,000
Income taxes payable . . . . . . . . . . . . . . . . . . . . 1,038,000 1,038,000
Current portion of capital lease obligation. . . . . . . . . 45,000 42,000
------------- -------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . 4,564,000 3,780,000
LONG TERM LIABILITIES: . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 80,000 83,000
Deferred compensation. . . . . . . . . . . . . . . . . . . . 24,000 90,000
Other long-term liabilities. . . . . . . . . . . . . . . . . 251,000 266,000
Capital lease obligation . . . . . . . . . . . . . . . . . . 3,490,000 3,525,000
------------- -------------
TOTAL LONG-TERM LIABILITIES. . . . . . . . . . . . . . . . 3,845,000 3,964,000
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
7,323,068 shares in 1996 and 7,216,195 shares in 1995. . . 7,323,000 7,216,000
Class B Common Stock, $1.00 par value,
2,000,000 shares authorized; issued and outstanding
449,645 shares in 1996 and 458,474 shares in 1995. . . . . 450,000 458,000
Additional paid-in capital . . . . . . . . . . . . . . . . . 24,378,000 23,908,000
Deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . (19,115,000) (11,179,000)
------------- -------------
13,036,000 20,403,000
Equity adjustment from foreign currency translation. . . . . (180,000) (142,000)
------------- -------------
12,856,000 20,261,000
------------- -------------
$ 21,265,000 $ 28,005,000
============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31 JULY 31
-------------------------- -------------------------
1996 1995 1996 1995
REVENUES
Sales. . . . . . . . . . . . .$ 2,973,000 $ 4,869,000 $ 10,352,000 $ 12,790,000
Other. . . . . . . . . . . . . 59,000 132,000 150,000 345,000
------------ ------------ ------------ ------------
3,032,000 5,001,000 10,502,000 13,135,000
------------ ------------ ------------ ------------
COSTS AND EXPENSES:. . . . . . .
Cost of sales. . . . . . . . . 2,489,000 3,519,000 7,683,000 9,049,000
Research and development . . . 249,000 165,000 811,000 551,000
Selling, general and
administrative. . . . . . . 2,421,000 1,015,000 6,316,000 4,369,000
Write-off of software
development costs . . . . . -- -- 2,429,000 --
Amortization . . . . . . . . . 246,000 56,000 807,000 131,000
Interest . . . . . . . . . . . 132,000 135,000 392,000 417,000
------------ ------------ ------------ ------------
5,537000 4,890,000 18,438,000 14,517,000
------------ ------------ ------------ ------------
EARNINGS (LOSS) BEFORE
TAXES. . . . . . . . . . . . . . . (2,505,000) 111,000 (7,936,000) (1,382,000)
INCOME TAXES (BENEFIT) . . . . . . -- 36,000 -- (484,000)
------------ ------------ ------------ ------------
NET EARNINGS (LOSS). . . . . . . $(2,505,000) $ 75,000 $ (7,936,000) $ (898,000)
============ ============ ============ ============
NET EARNINGS (LOSS) PER
COMMON SHARE: . . . . . . . . . .
Primary and fully diluted. . . $ (.33) $ .01 $ (1.04) $ (.13)
AVERAGE COMMON SHARES
OUTSTANDING:. . . . . . . . . . .
Primary and fully diluted. . . 7,565,040 7,511,023 7,660,300 6,684,017
See Notes to Consolidated Financial Statements
2
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED JULY 31, 1996
(Unaudited)
Equity
Adjustment
Common Stock From
---------------------------------------------- Additional Foreign
Class A Class B Paid-in Currency Treasury
Shares Amount Shares Amount Capital Deficit Translation Stock
------- ------- ------- ------- ------- ------- ------------ -------
Balance-
October 31, 1995 7,216,195 $7,216,000 458,474 $ 458,000 $23,908,000 $(11,179,000) $ (142,000) --
Conversions of
Class B Common
to Class A Common 1,160 1,000 (1,160) (1,000)
Exercise of options 105,613 106,000 470,000 (7,669)
Issuance of common
stock 100
Foreign currency
translation (38,000)
Retirement of treasury
stock (7,669) (7,000) 7,669
Net loss (7,936,000)
---------- ---------- ---------- ---------- ---------- ------------ ---------- ----------
Balance -
July 31, 1996 7,323,068 $7,323,000 449,645 $ 450,000 $24,378,000 $(19,115,000) $ (180,000) --
========== ========== ========== ========== ========== ============ ========== ==========
See Notes to Consolidated Statements
3
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
JULY 31,
------------------------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . $ (7,936,000) $ (898,000)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization. . . . . . . . . . . . 1,224,000 349,000
Write-off of software development costs. . . . . . . 2,429,000 --
Accounts receivable. . . . . . . . . . . . . . . . . 270,000 (2,496,000)
Inventories. . . . . . . . . . . . . . . . . . . . . 80,000 78,000
Other current assets . . . . . . . . . . . . . . . . 67,000 (432,000)
Accounts payable . . . . . . . . . . . . . . . . . . (210,000) 316,000
Accrued expenses . . . . . . . . . . . . . . . . . . 836,000 (39,000)
Customers' advance payments. . . . . . . . . . . . . 158,000 469,000
Deferred compensation. . . . . . . . . . . . . . . . (66,000) (62,000)
Other assets . . . . . . . . . . . . . . . . . . . . (2,622,000) (1,529,000)
Other long-term liabilities. . . . . . . . . . . . . (14,000) --
Income taxes payable . . . . . . . . . . . . . . . . (3,000) (484,000)
. . . . . . . . . . . . . . . . . . . . . . . . . . ------------ ------------
NET CASH USED IN OPERATIONS. . . . . . . . . . . . . (5,787,000) (4,728,000)
------------ ------------
CASH FLOWS USED IN INVESTING
ACTIVITIES:
Additions to property, plant and equipment-net . . . (697,000) (260,000)
Decrease in long-term lease obligation - net of current
portion. . . . . . . . . . . . . . . . . . . . . . . -- (35,000)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES. . . . . . . . (697,000) (295,000)
CASH FLOWS PROVIDED FROM (USED IN) FINANCING
ACTIVITIES:
Repayment of amounts borrowed. . . . . . . . . . . . (32,000) --
Proceeds from issuance of common stock . . . . . . . 569,000 11,357,000
------------ ------------
NET CASH PROVIDED FROM FINANCING
ACTIVITIES . . . . . . . . . . . . . . . . . . . . . 537,000 11,357,000
Effect of exchange rate change on cash . . . . . . . (14,000) (3,000)
------------ ------------
NET (DECREASE) INCREASE IN CASH. . . . . . . . . . . . . (5,961,000) 6,331,000
CASH, beginning of period. . . . . . . . . . . . . . . . 7,221,000 1,868,000
------------ ------------
CASH, end of period. . . . . . . . . . . . . . . . . . . $ 1,260,000 $ 8,199,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest . . . . . . $ 390,000 $ 309,000
------------ ------------
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Retirement of treasury stock . . . . . . . . . . . . $ 7,000 $ 12,000
------------ ------------
See Notes to Consolidated Financial Statements
4
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JULY 31, 1996
(Unaudited)
A. DESCRIPTION OF BUSINESS
Base Ten Systems, Inc. and subsidiaries (the "Company") design, develop,
manufacture and market complex electronic systems for the defense industry
and comprehensive software solutions for the pharmaceutical industry.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
1. In management's opinion, all normal recurring adjustments necessary
for a fair statement of the results are included for the interim
periods presented.
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, 1995. The results of operations for the period ended July
31, 1996 are not necessarily indicative of the operating results for
the full year.
The financial information at the fiscal year ended October 31, 1995 is
derived from the audited consolidated financial statements of the
Company.
2. BASIS OF PRESENTATION - The Company's consolidated financial
statements have been prepared on an historical cost basis.
3. MEDICAL SOFTWARE REVENUE RECOGNITION - 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 products or orders which are more standardized in nature,
revenue is recognized on delivery.
4. WRITE-OFF OF CAPITALIZED SOFTWARE DEVELOPMENT COSTS - A portion of
the Company's software development costs since 1991 has 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 ("FAS 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
costs and determined that neither PRENVAL nor uPACS as it then existed
would achieve sufficient revenues in future periods to justify
retention of the related capitalized costs. Accordingly, the Company
wrote off $2.4 million of the balance of such capitalized costs. With
respect to PRENVAL, it became apparent to the Company in late
February 1996, after a discussion with the licensee, that market
acceptance of the product was less than anticipated. 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 and that, as a result, sales would not exceed the
amount necessary to generate royalties in excess of the minimum
provided under the license. Effective as of the end of the second
quarter of fiscal 1996,
5
management resolved to suspend further development of PRENVAL.
However, the Company will provide marketing support for the remainder
of the license term. With respect to uPACS, the Company had
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 of the stand alone or manual
networked version of uPACS 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 wired networking, communications and off-line measurement
capabilities would be capable of producing acceptable sales volume.
5. OTHER ASSETS - Other assets at July 31, 1996 include $3,304,000 of
software development costs that remain capitalized in accordance with
FAS 86 after giving effect to the foregoing write-off of unrecoverable
development costs. See "Write-off of Capitalized Software Development
Costs" above. Amortization of the remaining capitalized software
development costs is computed on an individual product basis and is
the greater of (a) the ratio of current gross revenues for a product
to the total current and anticipated future gross revenues for that
product or (b) the straight-line method over the estimated economic
life of the product.
6. Selling, General and Administrative expenses include $.6 million of
costs incurred with a Form S-3 Registration Statement filed with the
Securities and Exchange Commission on June 19, 1996 and withdrawn on
August 12, 1996.
7. Statement of Cash Flows - The Company considers all investment with a
maturity date of three months or less at date of acquisition to be
cash equivalents.
8. CHANGE IN PRESENTATION - Certain balance sheet items for the interim
period in fiscal 1995 have been reclassified to conform to the 1996
presentation.
C. INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
JULY 31, 1996 OCTOBER 31, 1995
------------- ----------------
Raw materials. . . . . . . . . . . . $ 1,177,000 $ 1,557,000
Work in process. . . . . . . . . . . . 1,846,000 1,515,000
Finished goods . . . . . . . . . . . 80,000 95,000
----------- -----------
3,103,000 3,167,000
Less advance payments. . . . . . . . . 31,000 16,000
----------- -----------
$ 3,072,00 $ 3,151,000
=========== ===========
D. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are summarized as follows:
JULY 31, 1996 OCTOBER 31, 1995
------------- ----------------
Machinery and equipment. . . . . . . . $ 9,449,000 $ 8,853,000
Furniture and fixtures . . . . . . . . 676,000 617,000
Leased Asset - Land and Building . . . 3,600,000 3,600,000
Leasehold Improvement. . . . . . . . . 61,000 21,000
------------ -----------
13,786,000 13,091,000
Less accumulated depreciation
and amortization . . . . . . . . . . . 8,961,000 8,611,000
------------ -----------
$ 4,825,000 $ 4,480,000
============ ===========
6
E. 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 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 is a partnership, two of the partners of which
are directors and officers of the Company. 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 in effect at July 31, 1996 are
as follows:
Fiscal
------
1996 $ 140,000
1997 560,000
1998 560,000
1999 560,000
2000 615,000
2001 and thereafter 5,970,000
----------
8,405,000
Less:
Interest portion 4,870,000
----------
Present value of net minimum payments $3,535,000
==========
F. NET EARNINGS PER SHARE:
Loss per share for the periods ended July 31, 1996 and 1995 were calculated
using the number of weighted average common shares outstanding for each
period. The stock options and warrants would have an anti-dilutive effect
on loss per share for the quarter ended, July 31, 1995 and 1996 and
therefore were not included in the calculation of earnings per share.
G. SUBSEQUENT EVENT:
On August 9, 1996, the Company executed an agreement to sell $10 million of
its 9.01% convertible subordinated 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.
In addition, the Company's financing costs relating to this debenture
amounted to approximately $.6 million. These costs will be amortized over
the life of the loan. In August 1996, the Company received the proceeds
from the above agreement.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OR OPERATIONS
GENERAL
Base Ten Systems, Inc. (the "Company") develops and manufactures electronic
systems for the defense industry and software solutions for pharmaceutical
manufacturing and related commercial markets. The Company's manufacturing
execution, ultrasound archiving and weapons control software products are used
in safety critical applications requiring consistent and highly reliable results
where any deviation from the defined outcome could cause catastrophic loss. The
Company 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.
The Company developed a core competency in safety critical applications
from its historical focus on weapons management systems for military aircraft.
This expertise has been employed by the Company to develop various commercial
applications that include PHARMASYST, a computerized manufacturing execution
system ("MES") used to automate, monitor, control and document highly regulated
manufacturing processes, and uPACS, a computerized archiving system for
ultrasound images. The Company regards its commercial products, particularly
PHARMASYST, as a major source of future growth and has directed a significant
part of its business effort to this segment.
MEDICAL TECHNOLOGY OPERATIONS
In fiscal 1995 and the first nine months of fiscal 1996, the Company's
commercial operations generated revenues of $2.2 million and $1.1 million,
respectively, primarily from direct sales of PHARMASYST in 1996 and, for fiscal
1995, licensed sales of its PRENVAL medical screening software in Europe.
Commercial product sales represented 12% of total 1995 revenues and 10% of total
revenues in the first nine months of fiscal 1996.
PHARMASYST. The Company's PHARMASYST product is a PC driven MES, operating
in an open client/server environment that can be readily integrated with
existing manufacturing systems. Designed as a standard application rather than
a custom solution or toolkit, PHARMASYST acts as an electronic monitor ensuring
that the production process complies with a predefined set of specifications to
produce a consistent product. The Company believes that PHARMASYST is the only
PC driven commercially available standardized MES solution with the necessary
functionality and supporting documentation suitable for manufacturing in the
pharmaceutical and medical device industries regulated by the Food and Drug
Administration (the "FDA"). By automating workflow in the batch process
manufacturing environment, PHARMASYST is designed to facilitate compliance with
the FDA s current good manufacturing practices ("cGMP") and optimize plant floor
efficiency.
The Company has made PHARMASYST sales to fourteen customers. The Company
is currently installing PHARMASYST applications in facilities of Abbott Hospital
Products Division, Bayer Inc., Instrument Laboratories and Pfizer International
Products Group. Although these sales represent initial installations which may
be subject to cGMP validation by the FDA, the Company received orders for an
additional 27 installations. Several of the initial installations are scheduled
for validation during the latter part of 1996. A number of the remaining
installations are overdue in delivery, although the Company does not expect any
material cancellation.
To capitalize on the initial success and potentially broad application of
PHARMASYST, the Company has concentrated its development efforts in the first
nine months of fiscal 1996 on the completion of PHARM2, a standardized MES
product for integrating the PHARMASYST dispensing, electronic batch recording,
inventory control and document management applications into existing
manufacturing environments, with only the purchased applications activated. As
a modular software package, PHARM2 provides standard specifications, test
procedures and manuals, adding a high degree of flexibility to control costs and
installation time with a view to facilitating compliance with cGMP and
optimizing customer return on investment and is expected to be complete by the
end of calendar 1996.
8
During the first nine months of 1996, the Company increased its technical
staff and facilities to accommodate anticipated growth in the MES field and is
actively pursuing additional PHARM2 sales to the pharmaceutical and other
regulated industries, both domestically and abroad. The Company intends to
continue concentrating resources on the refinement and marketing of PHARM2,
which it expects to accelerate through arrangements recently implemented with
various systems integrators and vendors, including STG-Coopers & Lybrand
Consulting AG, Walsh Automation, Bailey Controls Company, Intellution, Toyo
Engineering Co. and Taisei Corporation. The shift in resources to exploit the
lead time of its MES technology contributed to the Company's net losses in
fiscal 1995 and the first nine months of fiscal 1996. These efforts can be
expected to result in additional losses over the next several quarters
in the absence of substantial increases in PHARMASYST sales.
REVENUE RECOGNITION FOR PHARM2. The Company has generally accounted for
most of its revenues using the percentage-of-completion method. Under this
method, revenues are recognized for each period based on the portion of a
contract completed during that period, with customer invoicing and payments
often occurring on a different cycle. As a result, accounts receivable include
work that has been completed but not yet billed. This approach is most suitable
for custom development or manufacturing projects. While the Company plans to
continue this revenue recognition policy for long term defense contracts and
sales of commercial products involving a substantial customization or
development component, the Company determined during the second quarter of
fiscal 1996, that PHARM2 had recently become standardized. Since most orders
for this product did not meet the criteria for long term contract accounting,
the Company will recognize revenues from PHARM2 orders generally on delivery.
Accordingly, revenues from certain PHARM2 orders that would have been recognized
in the second or third quarters of fiscal 1996 under the percentage-of-
completion method will not be recognized until subsequent periods. The
resulting deferral of revenue recognition on orders for this product line
contributed to the Company's losses in the first nine months of fiscal 1996 and
will continue to affect its operating results.
OTHER COMMERCIAL PRODUCTS. Although the Company obtained clearance from
the FDA for its PRENVAL medical screening software during 1995 and has received
guaranteed royalties under a license agreement for an upgraded version of this
product, market acceptance of the product in the EEC has not met expectations.
In May 1996, the Company determined that the licensee had no current plans to
market the product in the U.S., as originally anticipated, and that royalties in
excess of guaranteed minimum levels were unlikely. As a result, although the
Company will continue to provide technical and marketing support for the
remainder of the license term, it elected to suspend further development of this
product line at the end of the second quarter of fiscal 1996.
During the first nine months of fiscal 1996, the Company invested in the
development of uPACS with advanced features, including a networking system
which required manual transfer of magneto optical disks to allow the sharing
of a common archiving device by multiple ultrasound scanners. During the third
quarter of 1996, Base Ten received FDA approval of two separate 510(k)
premarket notification applications for uPACS sales in the U.S. on both stand
alone and manual networking systems. The Company determined in April 1996 that
anticipated sales of the stand alone uPACS software or manual networked systems
would not materialize. In September 1996 the Company received commitments from
Dr. Kleef Nach. Med. GmbH, an established distributor of medical products in
Germany, for exclusive German distribution rights for wired networked versions
of uPACS and a purchase order valued at between $350,000 and $450,000 for uPACS
units over the next year. These initial successes have encouraged the Company to
continue the development of the wired networked uPACS upgrade required for
penetrating U.S. markets.
WRITE-OFF OF CAPITALIZED SOFTWARE DEVELOPMENT COSTS. Development expenses
for the Company's commercial products are funded by the Company. Software
development costs for these new products are expensed as research and
development until they attain technological feasibility. Thereafter, these
expenditures are capitalized until the product attains commercial viability.
After establishing technological feasibility for PRENVAL in 1992, PHARMASYST in
1993 and uPACS in 1994, the Company incurred capitalized software development
costs for these products aggregating $1.7 million, $3.2 million and $1.1
million, respectively, through April 30, 1996. These capitalized software
development costs are normally amortized over the estimated economic life of
each product as long as the costs remain recoverable.
The Company performs periodic reviews of the recoverability of capitalized
software
9
development costs for its commercial products based on anticipated revenues and
cash flows from sales of these products. In the second quarter of fiscal 1996,
in view of its decision to defer further development and direct marketing of
PRENVAL and the failure to achieve any significant sales of its stand alone
or manual networked versions of uPACS software, the Company recognized a
$2.4 million writeoff of capitalized software development costs for these
products. The Company continues to capitalize its software development costs
for PHARM2 pending commercial viability.
DEFENSE OPERATIONS. The Company's primary revenue source during the last
three years and the first nine months of fiscal 1996 has been defense related
programs with the United States military and other agencies or contractors. In
July 1996, the Company was awarded a subcontract for the design and development
of an electronics countermeasures system (Interface Blanker Unit) for use on
the U.S. Navy F/A-18 aircraft, with the potential for substantial
production work upon completion of the development stage. The Company also
received a contract to provide the design and development of a maintenance
data recorder for the Apache helicopter, with potential production orders for
up to 1,000 systems.
In addition to domestic defense operations, the sale of weapons control
systems for the Tornado fighter aircraft program has remained a major source
of revenues. Late in 1995, the Company received full funding on a Tornado
production contract, resulting in acceleration of the manufacturing schedule,
with shipments commencing in the second quarter of fiscal 1996 and most of the
work expected to be completed by the end of the fiscal year. In the first
quarter of fiscal 1996, the Company received initial funding for a new
software program for the Tornado program under a contract valued at
$1.8 million and scheduled to be completed in early 1997. The Company
has provided cost information on a potential extension of this program that
could lead to additional contracts in the next few years valued at up to $12
million if government funding is available at that time.
Research and development for many of the Company's defense related projects
is performed for prime contractors under development contracts that generally
provide for full or partial funding of the development costs. The Company
recognizes the funding as revenues upon performance of the associated
development work.
RESULTS OF OPERATIONS
EXPENSE ITEMS AS A PERCENTAGE OF REVENUES. The following table sets forth,
for the periods indicated, certain items expressed as a percentage of total
revenues.
NINE MONTHS ENDED THREE MONTHS ENDED
JULY 31, JULY 31,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Defense. . . . . . . . . . . . . . . . . . . . . . . . 88.1% 86.5% 98.6% 72.6%
Commercial . . . . . . . . . . . . . . . . . . . . . . 10.7 10.9 0.8 24.8
Other. . . . . . . . . . . . . . . . . . . . . . . . . 1.2 2.6 0.6 2.6
------- -------- -------- --------
Total revenues . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0
Cost of sales. . . . . . . . . . . . . . . . . . . . . . 73.2 68.9 82.1 70.4
-------- -------- -------- --------
Gross margin . . . . . . . . . . . . . . . . . . . . . . 26.8 31.1 17.9 29.6
Operating expenses:
Research and development . . . . . . . . . . . . . . . 7.7 4.2 8.2 3.3
Selling, general and administrative. . . . . . . . . . 60.1 33.3 79.8 20.3
Writeoff of software development costs . . . . . . . . 23.1 --- --- ---
Amortization . . . . . . . . . . . . . . . . . . . . . 7.7 1.0 8.1 1.1
Interest . . . . . . . . . . . . . . . . . . . . . . . 3.8 3.1 4.4 2.7
-------- -------- -------- --------
Total operating expenses . . . . . . . . . . . . . . . . 102.4 41.6 100.5 27.4
-------- -------- -------- --------
Earnings (loss). . . . . . . . . . . . . . . . . . . . . (75.6) (10.5) (82.6) 2.2
Income taxes (benefit) . . . . . . . . . . . . . . . . . --- (3.7) --- .7
-------- -------- -------- --------
Net earnings (loss). . . . . . . . . . . . . . . . . . . (75.6)% (6.8)% (82.6)% 1.5%
======== ======== ======== ========
NINE MONTHS AND THREE MONTHS ENDED APRIL 30, 1996 AND 1995. Revenues for
the first nine months of fiscal 1996 decreased 20.0% to $10.5 million from $13.1
million in the same period last
10
year. For the third quarter of fiscal 1996, revenues were $3.0 million, down
39.4% from $5.0 million in the third quarter of fiscal 1995. The difference
resulted primarily from an 18.8% decrease in defense revenues from $11.4 million
in the first nine months of fiscal 1995 to $9.2 million in the current nine-
month period and a 18.7% decrease from $3.6 million in the third quarter of
fiscal 1995 to $2.9 million in the current quarter. The decrease in defense
revenues reflects reduced defense bookings at the end of fiscal 1995 and the
inability to recognize revenue from two new contracts since work was not
authorized until late July, despite selection as a supplier in April, 1996. In
addition, revenues from commercial operations decreased by $.3 million in the
first nine months of fiscal 1996 and by $1.2 million in the third quarter of
fiscal 1996 compared to the same periods last year, reflecting a change in the
Company's revenue recognition method for PHARM2 orders and the completion of
guaranteed royalties recognized under a PRENVAL license agreement in fiscal
1995. See "Commercial Operations--Revenue Recognition for PHARM2" and "Defense
Operations" above.
During the first nine months of fiscal 1996, domestic defense programs
accounted for $5.2 million or 49.6% of revenues compared to $7.1 million or
53.8% of revenues in the year-earlier period. Tornado operations accounted for
$4.1 million or 38.7% of revenues in the first nine months of fiscal 1996 and
$4.4 million or 33.7% of revenues in the corresponding period last year. During
the first nine months of fiscal 1996 and 1995, revenues from the Company's
build-to-print business were $1.2 million or 11.2% of revenues and
$3.7 million or 28.5% of revenues, respectively.
Cost of sales declined by 15.1% from $9.0 million or 68.9% of revenues for
the first nine months of fiscal 1995 to $7.7 million or 73.2% of revenues in the
current nine-month period. For the third quarter of fiscal 1996, cost of sales
aggregated $2.5 million or 82.1% of revenues, a decrease of 29.3% from $3.5
million or 70.4% of revenues in the corresponding quarter last year. The
primary variables were the lower volumes of defense sales in the current interim
periods and the higher portion of fixed costs associated with defense
operations. Since the Company's commercial software development costs have been
largely capitalized, the margins for these products are higher than defense
product margins. As PHARMASYST sales increase as a percentage of total
revenues, cost of sales are expected to improve in future periods.
Research and development ("R&D") expenses aggregated $.8 million or 7.7%
of revenues in the first nine months of fiscal 1996 and $.6 million or 4.2%
of revenues in the year-earlier period. For the third quarter of fiscal 1996
and 1995, R&D expenses were $.2 million or 8.2% of revenues and $.2 million
or 3.3% of revenues, respectively. The Company's R&D expenses do not include
capitalized software development costs of $2.8 million in the current
nine-month period and $1.7 million in the year-earlier period. The Company's
investment in new products on a cash flow basis includes both of these
components, although capitalized items only affect operating results through
noncash amortization charges over the estimated economic life of each
product. Extensive efforts to accelerate the marketability of PHARMASYST and
the networked uPACS were recorded as selling, general and administrative
expenses rather than R&D expenses or capitalized software development costs.
Selling, general and administrative expenses increased by 44.6% to $6.3
million in the first nine months of fiscal 1996, representing 60.1% of revenues,
compared with $4.4 million or 33.3% of revenues in the year-earlier period. For
the third quarters of fiscal 1996 and 1995, these expenses were $2.4 million or
79.8% of revenues and $1.0 million or 20.3% of revenues, respectively. The
increase is attributable to the Company's efforts to accelerate development of
its PHARMASYST system and to the recognition of transactional costs totaling
$.6 million for a contemplated equity public offering that was withdrawn in
August, 1996. See "Liquidity and Capital Resources" below.
In order to improve financial performance, the Company implemented a cost
reduction plan in 1995. The cost reduction plan included a decrease in
manufacturing staff, a suspension of various consulting agreements and other
cost saving measures. In addition, each officer of the Company and its
divisions worked for the minimum wage during part of 1995, and certain of these
employees received three year loans equal to their relinquished salary. A
portion of these loans were canceled in the first nine months of fiscal 1996
contributing to the increase in selling, general and administrative expenses for
the current nine-month period. Additional increases in these expenses are
anticipated as
11
the Company continues to strengthen its organization with experienced project
and software engineering talent and to increase its marketing and sales
activities focused primarily on PHARMASYST sales.
The Company recognized a nonrecurring charge of $2.4 million in the second
quarter of fiscal 1996 from a writeoff of capitalized software development costs
for PRENVAL and the stand alone and manual networked version of uPACS. See
"Commercial Operations--Writeoff of Capitalized Software Development Costs"
above. Noncash charges for amortization of capitalized software development
costs increased to $.8 million for the current nine-month period and $.2 million
for the current quarter. The writeoff of capitalized expenses in the second
quarter of 1996 will contribute to lower amortization charges in future
periods.
Interest expense was $.4 million in the first nine months of fiscal 1996
and 1995. All of the interest expense represents capitalized lease costs
incurred under a sale and leaseback transaction involving the sale of the
Company's facility in Trenton, New Jersey and repayment of the outstanding
mortgage loan at the end of 1994. The transaction resulted in total long term
lease obligations aggregating $3.6 million.
The Company recognized net losses of $7.9 million or $1.04 per share on 7.7
million weighted average shares for the first nine months of fiscal 1996 and $.9
million or $.13 per share on 6.7 million weighted average shares for the
corresponding period in fiscal 1995, reflecting the foregoing developments. For
the third quarter of fiscal 1996, the Company recognized a let loss of $2.5
million or $.33 per share on 7.6 million weighted average shares.
FLUCTUATIONS IN QUARTERLY RESULTS. The Company's revenues and operating
results are subject to quarterly fluctuations due primarily to the timing of
contract stage completions and product deliveries as well as the booking of new
business. These factors are characteristic of the Company's business
environment and can impact quarterly performance without necessarily affecting
results for the full year or long term profitability. In the fourth quarter of
fiscal 1995, the Company experienced reduced order writing for its defense
products, resulting in reduced shipment schedules for the first nine months of
fiscal 1996. The Company's financial results for the first nine months of
fiscal 1996 were also adversely affected by severe weather in New Jersey,
resulting in plant shutdowns. These delays resulted in reduced manufacturing
output, with an adverse affect on revenues and earnings. In addition, the
percentage of completion method historically used by the Company in accounting
for PHARMASYST orders has resulted in its recognition of revenues primarily
toward the beginning of the installation schedule. In view of the reduced
customization component for PHARM2, revenues from sales of this software
commencing in the second quarter of fiscal 1996 are being recognized upon
product delivery, adversely affecting operating results for the second and third
quarters of the year. See "Commercial Operations--Revenue Recognition for
PHARM2" and "Defense Operations" above.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. The Company's working capital decreased from $13.3 million at
October 31, 1995 to $6.1 million at July 31, 1996, and cash decreased by $6.0
million, reflecting the loss for the period as well as increases in other assets
and accrued expenses. $2.8 million in cash was used in the first nine
months of fiscal 1996 to fund capitalized software development costs. Cash
remaining at July 31, 1996 totaled $1.3 million.
During the third quarter of fiscal 1996, the Company planned a public
equity offering but elected to withdraw the transaction and alternative
financing was secured in August 1996. Although associated transactional costs
of $.6 million contributed to the Company's net loss for the third quarter of
1996, the Company's liquidity was improved by the August 1996 issuance of
$10 million principal amount of its 9.01% Convertible Subordinated Debentures
due August 2003 (the "Debentures"). See "Capital Resources" below.
12
CAPITAL RESOURCES.
In November 1994, the Company issued 816,709 shares of its Common Stock
upon the exercise of substantially all its expiring Series B Rights at an
exercise price of $6.00 per share. Net proceeds from the exercise of the Series
B Rights aggregated approximately $4.2 million. In April and May 1995, the
Company issued approximately 1.2 million shares of its Common Stock upon the
exercise of substantially all its expiring Class A Common Purchase Warrants at
an exercise price of $6.00 per share. Net proceeds from the exercise of the
Warrants totaled approximately $6.9 million.
In August 1996, the Company issued the Debentures to a principal
stockholder in a private placement, generating net proceeds of $9.4 million and
enabling the Company to continue its aggressive development and marketing plans
for PHARM2 and its wired networked uPACS. The Debentures are convertible at
the option of the holder into the Company's Class A Common Stock at a conversion
price of $12.50 per share, representing 125% of the Common Stock closing price
on the issuance date. The Company has the right to call the Debentures after
February 28, 1998 if the market price of the Class A Common Stock exceeds a
specified threshold.
The Company believes that its working capital and funds generated from
operations will be sufficient to support its operations and planned development
activities. Accordingly, the Company does not anticipate incurring any long
term borrowings other than the Debentures to support its operations for the
foreseeable future.
13
PART II. OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS - None
(b) REPORTS ON FORM 8-K - The Company filed a Current Report on Form 8-K
on August 12, 1996 relating to an agreement to sell up to $10 million
of the Company's 9.01% convertible subordinated debentures due August
31, 2003.
14
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 13, 1996
BASE TEN SYSTEMS, INC.
(Registrant)
By: /S/ MYLES M. KRANZLER
--------------------------------------
Myles M. Kranzler
President and Chairman of the Board
(Principal Executive Officer)
By: /S/ EDWARD J. KLINSPORT
--------------------------------------
Edward J. Klinsport
Executive Vice President and Chief
Financial Officer
15