U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
| x | Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended July 3, 2005
| ¨ | Transition report under Section 13 or 15(d) of the Exchange Act |
For the transition period from to
Commission file number 0-29024
BENTHOS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
| Massachusetts | 04-2381876 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I. R. S. Employer Identification No.) |
49 Edgerton Drive, North Falmouth, Massachusetts 02556
(Address of Principal Executive Offices)
508-563-1000
Issuer’s Telephone Number Including Area Code
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:
Common Stock, par value $.06 2/3 | 2,100,642 | |
(Class) | (Outstanding shares at August 10, 2005) |
Transitional Small Business Disclosure Format (check one): Yes ¨ No x
BENTHOS, INC. AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTER ENDED
JUNE 30, 2005
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PART I - FINANCIAL INFORMATION
Benthos, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
| June 30, 2005 | September 30, 2004 | |||||||
Assets | ||||||||
Current Assets: | ||||||||
Cash and Cash Equivalents | $ | 9,513 | $ | 241 | ||||
Accounts Receivable, Net | 3,343 | 3,565 | ||||||
Inventories | 3,747 | 3,149 | ||||||
Prepaid Expenses and Other Current Assets | 87 | 168 | ||||||
Total Current Assets | 16,690 | 7,123 | ||||||
Property, Plant and Equipment, Net | 1,132 | 1,189 | ||||||
Goodwill | 576 | 576 | ||||||
Acquired Intangible Assets, Net | 39 | 218 | ||||||
Other Assets, Net | 25 | 35 | ||||||
| $ | 18,462 | $ | 9,141 | |||||
Liabilities and Stockholders’ Investment | ||||||||
Current Liabilities: | ||||||||
Current Portion of Long-Term Debt | $ | 279 | $ | 279 | ||||
Accounts Payable | 1,392 | 1,217 | ||||||
Accrued Expenses | 2,065 | 1,558 | ||||||
Customer Deposits | 264 | 302 | ||||||
Total Current Liabilities | 4,000 | 3,356 | ||||||
Long-Term Debt, Net of Current Portion | 46 | 256 | ||||||
Stockholders’ Investment: | ||||||||
Common stock, $.06 2/3 Par Value- Authorized – 7,500 Shares Issued – 2,370 and 1,665 Shares at June 30, 2005 and September 30, 2004, respectively | 158 | 111 | ||||||
Capital in Excess of Par Value | 9,541 | 1,648 | ||||||
Retained Earnings | 5,348 | 4,401 | ||||||
Treasury Stock, at cost– 270 shares at June 30, 2005 and September 30, 2004 | (631 | ) | (631 | ) | ||||
Total Stockholders’ Investment | 14,416 | 5,529 | ||||||
| $ | 18,462 | $ | 9,141 | |||||
See accompanying notes to Condensed Consolidated Financial Statements.
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Benthos, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
| Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Product Sales | $ | 6,246 | $ | 5,442 | $ | 16,078 | $ | 12,476 | ||||||||
Services | 452 | 304 | 1,553 | 1,288 | ||||||||||||
Total Net Sales | 6,698 | 5,746 | 17,631 | 13,764 | ||||||||||||
Cost of Product Sales | 3,336 | 3,121 | 9,098 | 7,381 | ||||||||||||
Cost of Services | 228 | 215 | 833 | 770 | ||||||||||||
Gross Profit | 3,134 | 2,410 | 7,700 | 5,613 | ||||||||||||
Selling, General & Administrative Expenses | 1,802 | 1,438 | 4,724 | 3,919 | ||||||||||||
Research and Development Expenses | 624 | 430 | 1,580 | 1,224 | ||||||||||||
Amortization of Acquired Intangibles | 60 | 60 | 179 | 179 | ||||||||||||
Income from Operations | 648 | 482 | 1,217 | 291 | ||||||||||||
Interest Income | 20 | 1 | 20 | 1 | ||||||||||||
Interest Expense | (7 | ) | (15 | ) | (22 | ) | (47 | ) | ||||||||
Income before Income Taxes | 661 | 468 | 1,215 | 245 | ||||||||||||
Provision for Income Taxes | 145 | 12 | 267 | 12 | ||||||||||||
Net Income | $ | 516 | $ | 456 | $ | 948 | $ | 233 | ||||||||
Basic Earnings Per Share | $ | 0.32 | $ | 0.33 | $ | 0.63 | $ | 0.17 | ||||||||
Diluted Earnings Per Share | $ | 0.29 | $ | 0.31 | $ | 0.56 | $ | 0.17 | ||||||||
Weighted Average Number of Shares Outstanding | 1,637 | 1,383 | 1,480 | 1,383 | ||||||||||||
Weighted Average Number of Shares Outstanding, Assuming Dilution | 1,800 | 1,452 | 1,671 | 1,406 | ||||||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
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Benthos, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Nine Months Ended | ||||||||
| June 30, 2005 | June 30, 2004 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net Income | $ | 948 | $ | 233 | ||||
Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities: | ||||||||
Depreciation and Amortization | 544 | 730 | ||||||
Changes in Assets and Liabilities: | ||||||||
Accounts Receivable | 222 | (517 | ) | |||||
Inventories | (782 | ) | (21 | ) | ||||
Prepaid Expenses and Other Current Assets | 81 | 14 | ||||||
Accounts Payable and Accrued Expenses | 682 | (857 | ) | |||||
Customer Deposits | (38 | ) | — | |||||
Net Cash Provided by (Used in) Operating Activities | 1,657 | (418 | ) | |||||
Cash Flows from Investing Activities: | ||||||||
Purchases of Property, Plant and Equipment | (115 | ) | (78 | ) | ||||
Cash Received from Sale of Real Estate | — | 1,150 | ||||||
Net Cash (Used in) Provided by Investing Activities | (115 | ) | 1,072 | |||||
Cash Flows from Financing Activities: | ||||||||
Payments on Long-Term Debt | (210 | ) | (809 | ) | ||||
Proceeds from Exercise of Stock Options | 256 | — | ||||||
Proceeds from Issuance of Common Stock | 7,684 | — | ||||||
Net Cash Provided by (Used in) Financing Activities | 7,730 | (809 | ) | |||||
Net Increase (Decrease) in Cash and Cash Equivalents | 9,272 | (155 | ) | |||||
Cash and Cash Equivalents, Beginning of Period | 241 | 204 | ||||||
Cash and Cash Equivalents, End of Period | $ | 9,513 | $ | 49 | ||||
Supplemental Disclosure of Cash Flow Information: | ||||||||
Interest Paid | $ | 22 | $ | 52 | ||||
Income Taxes Paid, Net | $ | 193 | $ | 77 | ||||
Supplemental Disclosure of Non-cash Investing Activities: | ||||||||
Transfer of inventory to Property, Plant and Equipment as demonstration equipment | $ | 667 | $ | 647 | ||||
See accompanying notes to Condensed Consolidated Financial Statements.
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Benthos, Inc. and Subsidiaries
Notes to Financial Statements
(in thousands, except per share amounts)
1. Fiscal Periods
The fiscal year of Benthos, Inc. (the Company) ends on September 30. Interim quarters are composed of 13 weeks unless otherwise noted and end on the Sunday closest to December 31, March 31, and June 30. All references in the unaudited condensed consolidated financial statements to fiscal periods ended on December 31, March 31, or June 30 mean the interim quarters referred to above.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended September 30, 2004, included in the Company’s previously filed Form 10-KSB. The accompanying condensed consolidated financial statements reflect all adjustments (consisting solely of normal, recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of results for the interim periods presented. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full fiscal year. Certain reclassifications have been made to the fiscal year 2004 financial statements to conform to the fiscal year 2005 presentation.
3. Public Offering
In May 2005, the Company completed a public offering of 656 shares of common stock at $13.20 per share (the “Offering”). The net proceeds of the offering, after deducting applicable issuance costs and expenses, were $7,684.
4. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following:
| June 30, 2005 | September 30, 2004 | |||||
Raw Materials | $ | 224 | $ | 235 | ||
Work-in-Process | 3,497 | 2,806 | ||||
Finished Goods | 26 | 108 | ||||
| $ | 3,747 | $ | 3,149 | |||
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5. Note Receivable and Other Receivable – Real Estate
On September 29, 2003, the Company completed the sale of two parcels of real estate in Falmouth Massachusetts, called the South Side and the North Side parcels, for a total sales price of $2,500. The gross proceeds of $1,300 for the South Side parcel were received on September 30, 2003. The Company used $650 of these proceeds to repay a portion of the principal on the term loan. The proceeds for the North Side parcel were $1,150, net of $50 in commissions. The Company received these proceeds in October 2003. The Company used $600 of these proceeds to repay an additional portion of the principal on the term loan in fiscal year 2004.
6. Earnings Per Share
A reconciliation of basic and diluted shares outstanding is as follows:
| Three Months Ended June 30, | Nine Months Ended June 30, | |||||||
| 2005 | 2004 | 2005 | 2004 | |||||
Basic weighted average common shares outstanding | 1,637 | 1,383 | 1,480 | 1,383 | ||||
Weighted average common share equivalents | 163 | 69 | 191 | 23 | ||||
Diluted weighted average shares outstanding | 1,800 | 1,452 | 1,671 | 1,406 | ||||
The following securities were not included in computing earnings per share because their effects would be anti-dilutive:
| Three Months Ended June 30, | Nine Months Ended June 30, | |||||||
| 2005 | 2004 | 2005 | 2004 | |||||
Options to purchase common stock | 40 | 146 | 17 | 171 | ||||
7. Stock Options
At June 30, 2005, the Company had two current stock-based compensation plans in effect (one plan for employees and one plan for non-employee directors). The Company accounts for these plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation cost is reflected in net income (loss), as the options granted under these plans had an exercise price equal to, or greater than, the market value of the underlying common stock on the date of the grant.
The Company provides pro forma disclosures of compensation expense under the fair value method of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” and SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.”
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The assumptions used in computing fair value were as follows:
| Nine Months Ended June 30, | |||||
| 2005 | 2004 | ||||
Risk-free interest rate | 3.78 | % | 3.26% - 3.96% | ||
Expected dividend yield | — | — | |||
Expected life (in years) | 7 | 7 | |||
Expected volatility | 71 | % | 60% | ||
Had compensation cost for the Company’s stock option plans been determined using the fair value method at the grant dates, the effect on the Company’s net income and net income per share for the periods shown below would have been as follows:
| Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Net income as reported: | $ | 516 | $ | 456 | $ | 948 | $ | 233 | ||||||||
Add: | ||||||||||||||||
Stock-based employee compensation expense included in net income, net of related tax effects | — | — | — | — | ||||||||||||
Deduct: | ||||||||||||||||
Total stock-based employee compensation determined under fair value method for all awards, net of related tax effects | (16 | ) | (39 | ) | (46 | ) | (118 | ) | ||||||||
Pro forma net income | $ | 500 | $ | 417 | $ | 902 | $ | 115 | ||||||||
Basic income per share | ||||||||||||||||
As reported | $ | 0.32 | $ | 0.33 | $ | 0.63 | $ | 0.17 | ||||||||
Pro forma | $ | 0.31 | $ | 0.30 | $ | 0.61 | $ | 0.08 | ||||||||
Diluted income per share | ||||||||||||||||
As reported | $ | 0.29 | $ | 0.31 | $ | 0.56 | $ | 0.17 | ||||||||
Pro forma | $ | 0.29 | $ | 0.30 | $ | 0.54 | $ | 0.08 | ||||||||
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8. Segment Reporting
The Company views its operations and manages its business as two segments, Undersea Systems and Package Inspection Systems, as being strategic business units that offer different products. The Company evaluates performance of its operating segments based on revenues from external customers, income from operations and identifiable assets.
| Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||
| 2005 | 2004 | 2005 | 2004 | ||||||||||
Sales to Unaffiliated Customers: | |||||||||||||
Undersea Systems | $ | 3,773 | $ | 3,352 | $ | 11,344 | $ | 8,560 | |||||
Package Inspection Systems | 2,925 | 2,394 | 6,287 | 5,204 | |||||||||
Total | $ | 6,698 | $ | 5,746 | $ | 17,631 | $ | 13,764 | |||||
Gross Profit: | |||||||||||||
Undersea Systems | $ | 1,602 | $ | 1,378 | $ | 4,421 | $ | 3,459 | |||||
Package Inspection Systems | 1,532 | 1,032 | 3,279 | 2,154 | |||||||||
Total | $ | 3,134 | $ | 2,410 | $ | 7,700 | $ | 5,613 | |||||
Income (Loss) from Operations: | |||||||||||||
Undersea Systems | $ | 143 | $ | 242 | $ | 512 | $ | 309 | |||||
Package Inspection Systems | 505 | 240 | 705 | (18 | ) | ||||||||
Total | $ | 648 | $ | 482 | $ | 1,217 | $ | 291 | |||||
Identifiable Assets: | |||||||||||||
Undersea Systems | $ | 6,107 | $ | 5,188 | |||||||||
Package Inspection Systems | 2,170 | 2,425 | |||||||||||
Corporate Assets | 10,185 | 724 | |||||||||||
Total | $ | 18,462 | $ | 8,337 | |||||||||
Depreciation: | |||||||||||||
Undersea Systems | $ | 52 | $ | 85 | $ | 154 | $ | 217 | |||||
Package Inspection Systems | 29 | 120 | 122 | 272 | |||||||||
Corporate Assets | 4 | 26 | 80 | 50 | |||||||||
Total | $ | 85 | $ | 231 | $ | 356 | $ | 539 | |||||
Purchases of Fixed Assets: | |||||||||||||
Undersea Systems | $ | 5 | 13 | $ | 22 | $ | 48 | ||||||
Package Inspection Systems | 2 | 2 | 16 | 10 | |||||||||
Corporate Assets | 9 | — | 77 | 20 | |||||||||
Total | $ | 16 | $ | 15 | $ | 115 | $ | 78 | |||||
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Revenues by geographic area for the three and nine months ended June 30, 2005 and 2004 were as follows:
| Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||
Geographic Area: | ||||||||||||
United States | $ | 3,344 | $ | 2,188 | $ | 8,555 | $ | 6,659 | ||||
France | 1,163 | 729 | 3,303 | 765 | ||||||||
Other | 2,191 | 2,829 | 5,773 | 6,340 | ||||||||
Total | $ | 6,698 | $ | 5,746 | $ | 17,631 | $ | 13,764 | ||||
Revenues by product line within the Undersea Systems segment were as follows:
| Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||
Product Line: | ||||||||||||
Underwater Acoustics | $ | 1,451 | $ | 1,268 | $ | 4,349 | $ | 3,503 | ||||
Geophysical Exploration Equipment | 1,664 | 1,353 | 4,904 | 2,944 | ||||||||
Other Undersea Products | 658 | 731 | 2,091 | 2,113 | ||||||||
Total | $ | 3,773 | $ | 3,352 | $ | 11,344 | $ | 8,560 | ||||
The Package Inspection Systems segment has only one product line.
9. Credit Facility
The Company has a credit facility with a bank. This facility provides for loans under two notes: a $5,500 variable rate term note and a $600 variable rate line of credit. The term note is payable in 84 consecutive equal monthly installments of principal and accrues interest at prime (6.25% at June 30, 2005) plus 0.75%. The term note matures in August 2006. A final principal payment of $325 was made in July 2005 which paid the term loan in full.
The line of credit expires on January 31, 2006. Borrowings under the line of credit are payable as follows: monthly payments of interest only and unpaid principal and unpaid interest at maturity. The interest rate under the line of credit accrues at prime (6.25% at June 30, 2005) plus 0.75%. Advances are limited to 45% of eligible accounts receivable. The availability under the line of credit was $600 as of June 30, 2005. There were no advances outstanding under the line of credit as of June 30, 2005. The credit facility is secured by substantially all of the assets of the Company and requires the Company to meet certain covenants, including debt service coverage. As of June 30, 2005, the Company was in compliance with these covenants.
In July 2005, the Company renegotiated the line of credit with the bank. The available amount has been increased to $1,500 and the interest rate has been reduced to prime minus 0.50%. This line of credit expires on January 31, 2006.
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10. New Accounting Standards
In November 2004 the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs,” an amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and spoilage. This statement requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal” which was the criterion specified in ARB No. 43. In addition, this statement requires that allocation of fixed production overheads to the cost of production be based on normal capacity of the production facilities. This pronouncement is effective for the Company beginning October 1, 2005. The Company has not yet assessed the impact of adopting this new standard.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”) which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The new standard will be effective for the Company in reporting periods beginning October 1, 2006. The Company has not yet assessed the impact of adopting this new standard.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,” an amendment of APB Opinion No. 29, “Accounting for Nonmonetary Transactions.” The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, Opinion No. 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. The new standard will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company has not yet assessed the impact of adopting this new standard.
11. Comprehensive Income
SFAS No. 130, “Reporting Comprehensive Income,” requires disclosure of all components of comprehensive income. Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. The Company does not have any items of comprehensive income (loss) other than net income (loss).
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Item 2. Management’s Discussion and Analysis or Plan of Operation
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995
The statements in this Quarterly Report on Form 10-QSB relating to plans, strategies, economic performance and trends and other statements that are not descriptions of historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors which include: the timing of large project orders, competitive factors, shifts in customer demand, government spending, and economic cycles, as well as the factors described in this report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein as anticipated, believed, estimated, expected or intended. Factors that may cause or contribute to such differences include, but are not limited to those discussed in more detail under “Risks Relating to Our Business” in Exhibit 99 to this Quarterly Report on Form 10-QSB.
Overview
Benthos, Inc. and its subsidiaries (the “ Company”) design, manufacture, sell and service oceanographic products and systems for underwater exploration, oil and gas development and production, research and defense, as well as electronic inspection equipment for the automated assessment of the seal integrity, fill height, and other inspection criteria of food, dairy, beverage, pharmaceutical, personal care and chemical packages. Our customers are located throughout the world.
Prior to fiscal year 2004, we experienced a decrease in sales and incurred a loss from operations during the years ended September 30, 2003 and 2002. As a result, we did not, at various times, satisfy some of the financial covenants under our line of credit and term loan agreement with our bank. We obtained waivers of these defaults and the financial covenants were amended based upon our projections for the year ended September 30, 2004. We met our financial covenants in all periods of fiscal year 2004 and for the first nine months of fiscal year 2005. While there can be no guarantee that we will attain these projections for the year ending September 30, 2005, management believes that we will meet the covenants as required by the line of credit and have sufficient cash flows from operations along with our cash balances and availability from our line of credit to fund operations.
In the three months ended June 30, 2005, we achieved sales of $6,698,000, gross profit of $3,134,000, and net income of $516,000. These results were 16.6%, 30.0%, and 13.2% improvements over the quarter ended June 30, 2004, respectively. Sales of our Undersea Systems Division were $3,773,000, up 12.6% over the third quarter of fiscal year 2004, as a result of improved market conditions and large project orders in the geophysical exploration equipment and underwater acoustics product lines. Sales of our Package Inspection Systems Division were $2,925,000, an increase of 22.2% over the third quarter of fiscal year 2004, as a result of the timing of orders. Our international sales decreased by 5.7%, with the Undersea Systems Division up by 7.8% and the Package Inspection Systems Division down by 22.3% in the third quarter of fiscal year 2005 compared to the third quarter of fiscal year 2004.
Gross profit margins improved to 46.8% of sales in the third quarter of fiscal year 2005 as compared to 41.9% in the third quarter of fiscal year 2004. The improvement in gross margins in the third quarter of fiscal year 2005 was primarily in our Package Inspection Systems Division and was a result of increased sales volume and product mix and was offset by the improved margins of our Undersea Systems Division, which has lower margins than the products of our Package Inspection Systems Division.
We see many risks and opportunities in fiscal year 2005. The U. S. and world economies, government spending, the markets served by our divisions, energy prices, competitive pressures, the value of the U.S. dollar, orders by major customers, timing of project orders, launches of new products, and other factors may have an effect on fiscal year 2005 and beyond.
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Critical Accounting Policies
The preparation of financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an ongoing basis, management evaluates our estimates and assumptions, including but not limited to those related to revenue recognition, inventory valuation, warranty reserves, the impairment of long-lived assets, goodwill and other intangible assets, and income taxes. Management bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
1. Revenue Recognition
We recognize revenue when products are shipped to customers, provided that title has passed, there are no uncertainties regarding customer acceptance, there is persuasive evidence of an arrangement, the sales price is fixed or determinable and collection of the related receivable is probable. We generally enter into arrangements for multiple deliverables when we contract to deliver a product along with providing installation services. We follow Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables.” Based upon the criteria contained in EITF No. 00-21, we have determined that the deliverables are separable into units of accounting. Revenue is allocated based on the relative fair values of the individual units of accounting, and we generally recognize revenue from each of these units as each unit is delivered or performed. A general right of return or cancellation does not exist once the product is delivered to the customer. We show amounts received from customers for future delivery as customer deposits in our condensed consolidated balance sheets. We account for shipping and handling fees passed on to customers as sales, and we record the corresponding costs as cost of sales.
2. Inventory Valuation
We value our inventory at the lower of actual cost or the current estimated market value. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on historical usage for the prior twelve to twenty-four month period. Although we strive to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.
3. Warranty Reserves
Our warranties require us to repair or replace defective products returned to us during the applicable warranty period at no cost to the customer. We record an estimate for warranty-related costs based on actual historical return rates, anticipated return rates, and repair costs at the time of sale. A significant increase in product return rates, or a significant increase in the costs to repair products, could have a material adverse impact on our future operating results for the period or periods in which such returns or additional costs materialize and thereafter.
4. Goodwill
The goodwill associated with our 1999 acquisition of substantially all of the assets of Datasonics, Inc. is subject to an annual assessment for impairment by applying a fair-value based test. In the fourth quarter of fiscal year 2004, we completed a valuation of our then reported goodwill by comparing the fair value of our reporting units, as determined by an independent appraiser, to the reporting units’ then book value. The valuation indicated that the then recorded goodwill for our Undersea Systems business segment was not impaired. The valuation was based upon estimates of future income from the reporting units and estimates of the market value of the units, based on comparable recent transactions. These estimates of future income are based upon historical results, adjusted to reflect management’s best estimate of future market and operating conditions, and are periodically reviewed based on actual operating trends. Actual
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results may differ from these estimates. In addition, the relevancy of recent transactions used to establish the market value for our reporting units is based upon management’s judgment.
5. Income Taxes
We account for income taxes under the liability method in accordance with SFAS No. 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are determined based on differences between the financial reporting and income tax bases of assets and liabilities as well as net operating loss and tax credit carryforwards and are measured using the enacted tax rates and laws that will be in effect when the differences reverse. Deferred tax assets have been reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization.
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Results of Operations
Three Months Ended June 30, 2005 compared to Three Months Ended June 30, 2004
The following table presents, for the periods indicated, the percentage relationship of Condensed Consolidated Statements of Operations items to net sales:
| Three Months Ended | ||||||
| June 30, 2005 | June 30, 2004 | |||||
Net Sales | 100.0 | % | 100.0 | % | ||
Cost of Sales | 53.2 | % | 58.1 | % | ||
Gross Profit | 46.8 | % | 41.9 | % | ||
Selling, General and Administrative Expenses | 26.9 | % | 25.0 | % | ||
Research and Development Expenses | 9.3 | % | 7.5 | % | ||
Amortization of Acquired Intangibles | 0.9 | % | 1.0 | % | ||
Income from Operations | 9.7 | % | 8.4 | % | ||
Interest Income | 0.3 | % | — | % | ||
Interest Expense | (0.1 | )% | (0.3 | )% | ||
Income before income taxes | 9.9 | % | 8.1 | % | ||
Provision for income taxes | 2.2 | % | 0.2 | % | ||
Net Income | 7.7 | % | 7.9 | % | ||
Sales. The following table shows our sales by segments:
| Three Months Ended June 30, | ||||||
| 2005 | 2004 | |||||
| (In thousands) | ||||||
Sales to Unaffiliated Customers: | ||||||
Undersea Systems | $ | 3,773 | $ | 3,352 | ||
Package Inspection Systems | 2,925 | 2,394 | ||||
Total | $ | 6,698 | $ | 5,746 | ||
Net sales increased by 16.6% in the third quarter of fiscal year 2005 to $6,698,000 as compared to $5,746,000 in the third quarter of fiscal year 2004.
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The sales by product line within the Undersea Systems Division were as follows:
| Three Months Ended June 30, | ||||||
| 2005 | 2004 | |||||
| (In thousands) | ||||||
Product Line: | ||||||
Underwater Acoustics | $ | 1,451 | $ | 1,268 | ||
Geophysical Exploration Equipment | 1,664 | 1,353 | ||||
Other Undersea Products | 658 | 731 | ||||
Total | $ | 3,773 | $ | 3,352 | ||
Sales of our Undersea Systems Division increased by 12.6% to $3,773,000 in the third quarter of fiscal year 2005 as compared to $3,352,000 in the third quarter of fiscal year 2004. The increase in sales was concentrated in Geophysical Exploration Equipment and Underwater Acoustics. In the Geophysical Exploration Equipment product line, sales of geophysical hydrophones for use by the oil and gas industry increased by $283,000 in the third quarter of fiscal year 2005 as compared to fiscal year 2004. This was complemented by an increase in sales of geophysical systems of $28,000 in the third quarter of fiscal year 2005 as compared to the third quarter of fiscal year 2004. In the Underwater Acoustics product line, sales of our locator products and acoustic releases increased by $193,000 in the third quarter of fiscal year 2005 as compared to the third quarter of fiscal year 2004 and was offset slightly by decreases in the sales of our commercial and government acoustic modem products of $10,000 in the third quarter of fiscal year 2005 as compared to the third quarter of fiscal year 2004. As a result of increased exploration activity, possibly related to higher energy prices, and the change in our hydrophone technology license from an exclusive to a non-exclusive basis, we believe that in 2005 and future years we will face increased competition in the geophysical hydrophone market.
Sales of our Package Inspection Systems Division increased by 22.2% to $2,925,000 in the third quarter of fiscal year 2005 as compared to $2,394,000 in the third quarter of fiscal year 2004. The increase resulted largely from the timing of orders. The Package Inspection Systems segment has only one product line.
International sales decreased by 5.7% to $3,354,000 in the third quarter of fiscal year 2005 as compared to $3,558,000 in the third quarter of fiscal year 2004. The decrease in international sales was primarily in our Package Inspection Systems Division where international sales decreased by $356,000 and was partially offset by sales of our Geophysical Exploration Equipment where international sales of geophysical hydrophones for use by the oil and gas industry increased by $204,000.
Gross Profit. Gross profit increased by 30.0% to $3,134,000 for the third quarter of fiscal year 2005 as compared to $2,410,000 for the third quarter of fiscal year 2004. Gross profit as a percentage of sales was 46.8% in the third quarter of fiscal year 2005 as compared to 41.9% in the third quarter of fiscal year 2004. The increase in gross profit as a percentage of sales was attributable primarily to improved gross margins within our Package Inspection Division resulting from increased sales volume and pricing and was partly offset by a higher mix of sales from the Undersea Systems Division which has lower margins than the Package Inspection Systems Division. We believe that gross profit as a percentage of sales for the remainder of fiscal year 2005 will not materially differ from that achieved in the first nine months of that fiscal year.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by 25.3% to $1,802,000 for the third quarter of fiscal year 2005 as compared to $1,438,000 in the third quarter of fiscal year 2004. As a percentage of sales, selling, general and administrative expenses increased to 26.9% in the third quarter of fiscal year 2005 as compared to 25.0% for the third quarter of fiscal year 2004.
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The increase in selling, general and administrative expenses as a percentage of sales was a result of increased expenses and was partially offset by the increase in sales volume. The increase in selling, general and administrative expenses of $364,000 in the third quarter of fiscal year 2005, as compared to the third quarter of fiscal year 2004, was principally a result of increases in incentive compensation ($180,000) and profit-sharing ($34,000) accruals, and in legal and audit fees ($52,000) which included certain Sarbanes-Oxley compliance costs.
Research and Development Expenses. Research and development expenses increased 45.1% to $624,000 for the third quarter of fiscal year 2005 as compared to $430,000 in the third quarter of fiscal year 2004. As a percentage of sales, research and development expenses increased to 9.3% of sales in the third quarter of fiscal year 2005 from 7.5% in the third quarter of fiscal year 2004. The increase in the research and development expenses as a percentage of sales was primarily a result of increased spending and was partially offset by higher sales volume than in the third quarter of fiscal year 2004. Our research and development expenses in the third quarter of fiscal year 2005 were higher than in the third quarter of fiscal year 2004, as we had increased spending in new product development in both our Package Inspection Systems Division ($130,000) and on projects within our Undersea Systems Division ($64,000). We currently plan to increase spending on research and development during the remainder of fiscal year 2005.
Amortization of Acquired Intangibles. Amortization of acquired intangibles was $60,000 in each of the third quarters of fiscal years 2005 and 2004. The amortization of acquired intangibles related to the purchased technology we acquired in the Datasonics acquisition during fiscal year 1999. The remaining balance of $39,000 will be amortized in the fourth quarter of fiscal year 2005.
Interest Income. Interest income was $20,000 in the third quarter of fiscal year 2005 as compared to $1,000 in the third quarter of fiscal year 2004. The increase in interest income was a result of the investment returns on our invested cash and cash equivalents.
Interest Expense. Interest expense decreased to $7,000 in the third quarter of fiscal year 2005 as compared to $15,000 in the third quarter of fiscal year 2004. The decrease in interest expense was a result of reduced outstanding principal on the term loan.
Provision for Income Taxes. The provision for income taxes was $145,000 in the third quarter of fiscal year 2005 as compared to $12,000 in the third quarter of fiscal year 2004. Our effective tax rate was 21.9% in the third quarter of the current fiscal year. The rate in the third quarter of fiscal 2005 was lower than the statutory rate primarily as a result of the use of research and development tax credits. We have a valuation reserve of $2,000,000 related to our deferred tax assets. This reserve would reverse into income if and when the realization of the associated deferred tax assets becomes more likely than not.
Nine Months Ended June 30, 2005 compared to Nine Months Ended June 30, 2004
The following table presents, for the periods indicated, the percentage relationship of Condensed Consolidated Statements of Operations items to net sales:
| Nine Months Ended | ||||||
| June 30, 2005 | June 30, 2004 | |||||
Net Sales | 100.0 | % | 100.0 | % | ||
Cost of Sales | 56.3 | % | 59.2 | % | ||
Gross Profit | 43.7 | % | 40.8 | % | ||
Selling, General and Administrative Expenses | 26.8 | % | 28.5 | % | ||
Research and Development Expenses | 9.0 | % | 8.9 | % | ||
Amortization of Acquired Intangibles | 1.0 | % | 1.3 | % | ||
Income from Operations | 6.9 | % | 2.1 | % | ||
Interest Income | 0.1 | % | — | % | ||
Interest Expense | (0.1 | )% | (0.3 | )% | ||
Income before income taxes | 6.9 | % | 1.8 | % | ||
Provision for income taxes | 1.5 | % | 0.1 | % | ||
Net Income | 5.4 | % | 1.7 | % | ||
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Sales. The following table shows our sales by segments:
| Nine Months Ended June 30, | ||||||
| 2005 | 2004 | |||||
| (In thousands) | ||||||
Sales to Unaffiliated Customers: | ||||||
Undersea Systems | 11,344 | $ | 8,560 | |||
Package Inspection Systems | 6,287 | 5,204 | ||||
Total | $ | 17,631 | $ | 13,764 | ||
Net sales increased by 28.1% in the first nine months of fiscal year 2005 to $17,631,000 as compared to $13,764,000 in the first nine months of fiscal year 2004. The sales by product line within the Undersea Systems Division were as follows:
| Nine Months Ended June 30, | ||||||
| 2005 | 2004 | |||||
| (In thousands) | ||||||
Product Line: | ||||||
Underwater Acoustics | $ | 4,349 | $ | 3,503 | ||
Geophysical Exploration Equipment | 4,904 | 2,944 | ||||
Other Undersea Products | 2,091 | 2,113 | ||||
Total | $ | 11,344 | $ | 8,560 | ||
Sales of our Undersea Systems Division increased by 32.5% to $11,344,000 in the first nine months of fiscal year 2005 as compared to $8,560,000 in the first nine months of fiscal year 2004. The increase in sales was primarily concentrated in Geophysical Exploration Equipment and Underwater Acoustics. In the Geophysical Exploration Equipment product line, sales of geophysical hydrophones for use by the oil and gas industry increased by $1,763,000 in the first nine months of fiscal year 2005 as compared to fiscal year 2004. This was also complemented by an increase in sales of geophysical systems of $197,000 in the first nine months of fiscal year 2005 as compared to the first nine months of fiscal year 2004. In the Underwater Acoustics product line, sales of our commercial and government acoustic modem products increased by $507,000 in the first nine months of fiscal year 2005 as compared to the first nine months of fiscal year 2004 and was complemented by increases in the sales of our acoustic releases of $338,000 in the first nine months of fiscal year 2005 as compared to the first nine months of fiscal year 2004. As a result of increased exploration activity, possibly related to higher energy prices, and the change in our hydrophone
18
technology license from an exclusive to a non-exclusive basis, we believe that in 2005 and future years we will face increased competition in the geophysical hydrophone market.
Sales of our Package Inspection Systems Division increased by 20.8% to $6,287,000 in the first nine months of fiscal year 2005 as compared to $5,204,000 in the first nine months of fiscal year 2004. The increase resulted largely from the timing of orders. The Package Inspection Systems segment has only one product line.
International sales increased by 27.7% to $9,076,000 in the first nine months of fiscal year 2005 as compared to $7,105,000 in the first nine months of fiscal year 2004. The increase in international sales was primarily in Geophysical Exploration Equipment where international sales of geophysical hydrophones for use by the oil and gas industry increased by $1,838,000 and in our Package Inspection Systems Division where international sales increased by $236,000, and was partially offset by decreases in other areas.
Gross Profit. Gross profit increased by 37.2% to $7,700,000 for the first nine months of fiscal year 2005 as compared to $5,613,000 for the first nine months of fiscal year 2004. As a percentage of sales, gross profit was 43.7% in the first nine months of fiscal year 2005 as compared to 40.8% in the first nine months of fiscal year 2004. The increase in gross profit as a percentage of sales was attributable primarily to improved gross margins within our Package Inspection Division resulting from increased sales volume and pricing and was partly offset by a higher mix of sales from our Undersea Systems Division which has lower margins than the Package Inspection Systems Division. We believe that gross profit as a percentage of sales for the remainder of fiscal year 2005 will not materially differ from that achieved in the first nine months of that fiscal year.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by 20.5% to $4,724,000 for the first nine months of fiscal year 2005 as compared to $3,919,000 in the first nine months of fiscal year 2004. As a percentage of sales, selling, general and administrative expenses decreased to 26.8% in the first nine months of fiscal year 2005 as compared to 28.5% for the first nine months of fiscal year 2004. The decrease in selling, general and administrative expenses as a percentage of sales was a result of increased sales volume, partially offset by higher expenses The increase in selling, general and administrative expenses of $805,000 in the first nine months of fiscal year 2005, as compared to the first nine months of fiscal year 2004, was principally a result of increases in incentive compensation ($359,000) and profit-sharing ($79,000) accruals,in expenses related to our evaluation of our strategic alternatives ($99,000) that resulted in our public offering of common stock in May 2005, and in legal and audit fees ($153,000)which included certain Sarbanes-Oxley compliance costs.
Research and Development Expenses.Research and development expenses increased 29.1% to $1,580,000 for the first nine months of fiscal year 2005 as compared to $1,224,000 in the first nine months of fiscal year 2004. As a percentage of sales, research and development expenses increased to 9.0% of sales in the first nine months of fiscal year 2005 from 8.9% in the first nine months of fiscal year 2004.The increase in the research and development expenses as a percentage of sales was primarily a result of higher spending in the first nine months of fiscal year 2005 and was partially offset by higher sales volume than in the first nine months of fiscal year 2004. The spending on research and development expenses in the first nine months of fiscal year 2005 was $356,000 higher than in the first nine months of fiscal year 2004, as we had increased spending in new product development in our Package Inspection Systems Division ($316,000) and on projects within our Undersea Systems Division ($40,000). We currently plan to increase spending on research and development during the remainder of fiscal year 2005.
Amortization of Acquired Intangibles. Amortization of acquired intangibles was $179,000 in each of the first nine months of fiscal years 2005 and 2004. The amortization of acquired intangibles related to the purchased technology we acquired in the Datasonics acquisition during fiscal year 1999. The remaining balance of $39,000 will be amortized in the fourth quarter of fiscal year 2005.
Interest Income. Interest income was $20,000 in the first nine months of fiscal year 2005 as compared to $1,000 in the first nine months of fiscal year 2004. The increase in interest income was a result of the investment returns on our cash and cash equivalents.
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Interest Expense. Interest expense decreased to $22,000 in the first nine months of fiscal year 2005 as compared to $47,000 in the first nine months of fiscal year 2004. The decrease in interest expense was a result of reduced outstanding principal on the term loan.
Provision for Income Taxes. The provision for income taxes was $267,000 in the first nine months of fiscal year 2005 as compared to $12,000 in the first nine months of fiscal year 2004. The 2005 effective tax rate was 22.0%. The rate in the first nine months of fiscal 2005 was lower than the statutory rate primarily as a result of the use of research and development tax credits. We have a valuation reserve of $2,000,000 related to our deferred tax assets. This reserve would reverse into income if and when the realization of the associated assets becomes more likely than not.
Liquidity and Capital Resources
Cash Flows for the Nine Months Ended June 30, 2005. Our cash and cash equivalents increased $9,272,000 from September 30, 2004 to June 30, 2005. The following table presents, for the nine months ended June 30, 2005, the cash generated and used in our operations:
| Generated | Used | ||||||
| (In thousands) | |||||||
Depreciation and amortization (non cash) | $ | 544 | $ | — | |||
Decrease in accounts receivable | 222 | — | |||||
Net income | 948 | — | |||||
Decrease in prepaid expenses and other current assets | 81 | — | |||||
Decrease in customer deposits | — | (38 | ) | ||||
Increase in accounts payable and accrued expenses | 682 | — | |||||
Increase in inventories | — | (782 | ) | ||||
Total | $ | 2,477 | $ | (820 | ) | ||
Cash Generated | $ | 2,477 | ||
Cash Used | (820 | ) | ||
Total provided by operations | $ | 1,657 | ||
Cash of $1,657,000 was provided by operating activities, primarily the result of the net income achieved during the first nine months of $948,000, increases in accrued expenses of $507,000, decreases in accounts receivable of $222,000, increases in accounts payable of $175,000, decreases in prepaid expenses and other current assets of $81,000, increases in customer deposits of $51,000 and depreciation and amortization of $544,000. These sources were partially offset by decreases in customer deposits of $38,000, and an increase in inventory of $782,000 (which included $667,000 transferred to property, plant and equipment as demonstration equipment and $751,000 generated from the sale of demonstration equipment). We believe that our ability to maintain positive cash flow from operations in the future is primarily related to our ability to maintain our operating profits, maintain collection of accounts receivable through strict adherence to payment terms, maintain inventories by matching deliveries closer to scheduled shipment dates for our products, and manage accounts payable to vendors.
The Company used $115,000 of cash in its investing activities, primarily for purchases of property, plant and equipment.
Financing activities provided $7,730,000 of cash. Financing activities included $7,684,000 in proceeds from the issuance of common stock in our offering, and proceeds of $256,000 from the exercise of stock
20
options, partially offset by the payment of $210,000 on the term loan. We do not have any significant contractual obligations or commercial commitments.
Credit Facility. We have a credit facility with a bank. This facility provides for loans under two notes: a $5,500,000 variable rate term note and a $600,000 variable rate line of credit. The term note is payable in 84 consecutive equal monthly installments of principal and accrues interest at prime (6.25% at June 30, 2005) plus 0.75%. The term note matures in August 2006. Principal payments under the term note would have been $70,000 for the remainder of fiscal year 2005 and $255,000 in fiscal year 2006. A final principal payment of $325,000 was made in July 2005 which repaid the term loan in full.
The line of credit expires on January 31, 2006. Borrowings under the line of credit are payable as follows: monthly payments of interest only and unpaid principal and unpaid interest at maturity. Borrowings under the line of credit accrue interest at prime (6.25% at June 30, 2005) plus 0.75%. Advances are limited to 45% of eligible accounts receivable. The availability under the line of credit was $600,000 as of June 30, 2005. There were no advances outstanding under the line of credit as of June 30, 2005. The credit facility is secured by substantially all of our assets and requires us to meet certain covenants, including debt service coverage. As of June 30, 2005, we were in compliance with these covenants.
In July 2005, we renegotiated the line of credit with the bank. The available amount has been increased to $1,500,000 and the interest rate has been reduced to prime minus 0.50%. This line of credit expires on January 31, 2006.
During the 12 months ended June 30, 2005, we generated $1,735,000 of cash from operating activities. We believe that we will have sufficient cash from operating activities, cash balances, our existing line of credit and other potential financing sources to continue operations for the next 12 months.
21
Item 3. Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified within the Commission’s rules and forms, and that such information is accumulated and communicated to its management to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its chief executive officer and chief financial officer, of the effectiveness of the design and operation of its disclosure controls and procedures to meet the criteria referred to above. Based on the foregoing, its chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective.
Items 1 – 5. Not Applicable.
The exhibits set forth in the Exhibit Index on the following page are filed herewith (or incorporated by reference to the Company’s previous filings) as a part of this report.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BENTHOS, INC. | ||
By | /s/ Francis E. Dunne, Jr. | |
| Francis E. Dunne, Jr. | ||
| Vice President, Chief Financial Officer, | ||
| and Treasurer | ||
| (Principal Financial and Accounting Officer) | ||
DATE: August 16, 2005
22
EXHIBIT INDEX
BENTHOS, INC.
| Exhibit No. | Description | |
| 3.1 | Restated Articles of Organization(1) | |
| 3.2 | Articles of Amendment dated April 28, 1997(2) | |
| 3.3 | Articles of Amendment dated April 20, 1998(5) | |
| 3.4 | By-Laws(1) | |
| 3.5 | By-Law Amendments adopted January 23, 1998(4) | |
| 10.1 | Employment Contract with Samuel O. Raymond(1) | |
| 10.2 | Third Amendment to Employment Contract with Samuel O. Raymond(2) | |
| 10.3 | Fourth Amendment to Employment Agreement with Samuel O. Raymond(14) | |
| 10.4 | Amended and Restated Employment Agreement with Francis E. Dunne, Jr.(17) | |
| 10.5 | Amended and Restated Employment Agreement with James R. Kearbey(17) | |
| 10.6 | Employment Agreement between the Company and Francois Leroy(17) | |
| 10.7 | Employment Agreement between the Company and Richard B. Martin(19) | |
| 10.8 | Benthos, Inc. Fiscal Year 2005 Incentive Compensation Matrix(17) | |
| 10.9 | Employee Stock Ownership Plan(1) | |
| 10.10 | First Amendment to Employee Stock Ownership Plan(2) | |
| 10.11 | Second Amendment to Employee Stock Ownership Plan(7) | |
| 10.12 | Third Amendment to Employee Stock Ownership Plan(7) | |
| 10.13 | Fourth Amendment to Employee Stock Ownership Plan(9) | |
| 10.14 | Fifth Amendment to Employee Stock Ownership Plan(9) | |
| 10.15 | Amendment to Benthos, Inc. Employee Stock Ownership Plan dated July 19, 2004(16) | |
| 10.16 | Benthos, Inc. Employee Stock Ownership Plan as Amended and Restated Effective as of October 1, 2002(12) | |
| 10.17 | Benthos, Inc. 401(k) Retirement Plan dated March 2004(15) | |
| 10.18 | Supplemental Executive Retirement Plan(1) | |
| 10.19 | 1990 Stock Option Plan(1) | |
| 10.20 | 1994 Stock Option Plan for Non-Employee Directors(1) | |
| 10.21 | 1998 Non-Employee Directors’ Stock Option Plan(4) | |
| 10.22 | Benthos, Inc. 2000 Stock Incentive Plan(8) | |
| 10.23 | Credit Agreement between the Company and Cape Cod Bank and Trust Company dated August 18, 1999(7) | |
| 10.24 | First Amendment to Credit Agreement dated March 23, 2001(10) | |
| 10.25 | Second Amendment to Credit Agreement dated December 12, 2001(11) | |
| 10.26 | Third Amendment to Credit Agreement dated January 29, 2003(13) | |
| 10.27 | Fourth Amendment to Credit Agreement dated November 3, 2003(14) | |
| 10.28 | Fifth Amendment to Credit Agreement dated January 7, 2004(15) | |
| 10.29 | Sixth Amendment to Credit Agreement dated December 20, 2004(18) | |
| 10.30 | Seventh Amendment to Credit Agreement dated July 8, 2005(20) | |
| 10.31 | License Agreement between the Company and Optikos Corporation dated July 29, 1997(3) | |
| 10.32 | Hydrophone License Agreement between the Company and Sercel, Inc. (formerly Syntron, Inc.) dated December 5, 1996(6) | |
| 10.33 | Amendment Number 1 to Hydrophone License Agreement between the Company and Sercel, Inc. (formerly Syntron, Inc.) dated September 11, 1998(6) | |
| 10.34 | Agreement among the Company, Samuel O. Raymond and the Samuel O. Raymond 1996 Irrevocable Insurance Trust dated July 24, 2003(14) | |
| 10.35 | License Agreement with Simon Fraser University dated September 1, 2000(15) | |
| 10.36 | Amendment No. 1 to Simon Fraser License Agreement dated March 15, 2004(15) | |
| 10.37 | Contract with University of Wisconsin-Madison(15) | |
| 10.38 | License Agreement with Woods Hole Oceanographic Institution dated as of August 18, 2004(16) | |
| 21 | Subsidiaries of the Registrant(12) | |
| 31.1 | Section 302 Certification of Chief Executive Officer | |
| 31.2 | Section 302 Certification of Chief Financial Officer | |
| 32 | Section 1350 Certifications | |
| 99 | Risk Factors | |
| (1) | Previously filed as an exhibit to the Registrant’s Registration Statement on Form 10-SB filed with the Commission on December 17, 1996 (File No. 0-29024) and incorporated herein by this reference. |
| (2) | Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended March 30, 1997 (File No. 0-29024) and incorporated herein by this reference. |
| (3) | Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended June 29, 1997 (File No. 0-29024) and incorporated herein by this reference. |
| (4) | Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended December 31, 1997 (File No. 0-29024) and incorporated herein by this reference. |
| (5) | Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 1998 (File No. 0-29024) and incorporated herein by this reference. |
| (6) | Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended December 31, 1998 (File No. 0-29024) and incorporated herein by this reference. |
| (7) | Previously filed as an exhibit to Registrant’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 1999 (File No. 0-29024) and incorporated herein by this reference. |
| (8) | Previously filed as an exhibit to the Registrant’s definitive proxy statement filed on Schedule 14A on or about January 18, 2000 and incorporated herein by this reference. |
| (9) | Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2000 (File No. 0-29024) and incorporated herein by this reference. |
| (10) | Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 2001 (File No. 0-29024) and incorporated herein by this reference. |
| (11) | Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended December 31, 2001 (File No. 0-29024) and incorporated herein by this reference. |
| (12) | Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 2002 (File No. 0-29024) and incorporated herein by this reference. |
| (13) | Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 2003 (File No. 0-29024) and incorporated herein by this reference. |
| (14) | Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 2003 (File No. 0-29024) and incorporated herein by this reference. |
| (15) | Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2004 (File No. 0-29024) and incorporated herein by this reference. |
| (16) | Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 2004 (File No. 0-29024) and incorporated herein by this reference. |
| (17) | Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on or about January 24, 2005 (File No. 0-29024) and incorporated herein by this reference. |
| (18) | Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended December 31, 2004 (File No. 0-2904) and incorporated herein by this reference. |
| (19) | Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on or about June 30, 2005 (File No. 0-2904) and incorporated herein by this reference. |
| (20) | Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on or about July 8, 2005 (File No. 0-2904) and incorporated herein by this reference. |
