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 DECEMBER 31, 1999
/ / 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 (I. R. S. Employer
Corporation or Organization) Identification No.)
49 Edgerton Drive, North Falmouth, Massachusetts 02556
(Addresses of Principal Executive Offices) (Zip Code)
(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 1,375,294
(Class) (Outstanding stock at February 9, 2000)
Transitional Small Business Disclosure Format (check one):
Yes No X
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2
BENTHOS, INC. AND SUBSIDIARY
FORM 10-QSB
FOR THE THIRTEEN WEEKS ENDED
DECEMBER 31, 1999
INDEX
Page No.
Face Sheet 1
Index 2
Part I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) 3
December 31, 1999 and
September 30, 1999
Condensed Consolidated Statements of Earnings (unaudited) 4
Thirteen Weeks Ended
December 31, 1999 and
December 31, 1998
Condensed Consolidated Statements of Cash Flow (unaudited) 5
Thirteen Weeks Ended
December 31, 1999 and
December 31, 1998
Notes to Financial Statements 6-8
Item 2. Management's Discussion and Analysis 9-11
of Financial Condition and Results
of Operations
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 12
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Benthos, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
(unaudited)
Assets December 31, 1999 September 30, 1999
----------------- ------------------
Current Assets:
Cash and Cash Equivalents $ 1,736 $ 2,930
Accounts Receivable, Net 3,438 2,432
Inventories 4,281 4,794
Prepaid Expenses and Other Current Assets 776 734
Deferred Tax Asset 1,299 1,299
-------- --------
Total Current Assets 11,530 12,189
Property, Plant and Equipment, Net 1,745 1,779
Other Assets, Net 4,756 4,819
-------- --------
$ 18,031 $ 18,787
======== ========
Liabilities and Stockholders' Investment
Current Liabilities:
Current Maturities of Long Term Debt $ 786 $ 786
Accounts Payable 1,331 1,292
Accrued Expenses 1,704 2,311
Customer Deposits 247 391
-------- --------
Total Current Liabilities 4,068 4,780
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Long-Term Debt, Net of Current Maturities 4,452 4,649
Stockholders' Investment:
Common Stock, $.06 2/3 par value-
Authorized - 7,500 shares
Issued - 1,649 shares at December 31, 1999
and September 30, 1999 110 110
Capital in Excess of Par Value 1,546 1,546
Retained Earnings 8,516 8,437
Treasury Stock, at Cost (661) (735)
-------- --------
Total Stockholders' Investment 9,511 9,358
-------- --------
$ 18,031 $ 18,787
======== ========
See accompanying notes to Condensed Consolidated Financial Statements
4
Benthos, Inc. and Subsidiary
Condensed Consolidated Statements of Earnings
(in thousands, except per share amounts)
(unaudited)
Thirteen Weeks Ended
December 31, 1999 December 31, 1998
----------------- -----------------
Net Sales $ 5,411 $ 3,835
Cost of Sales 3,286 2,344
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Gross Profit 2,125 1,491
Selling, General & Administrative Expenses 1,345 905
Research and Development Expenses 464 285
Amortization of Goodwill and Other
Acquired Intangibles 123 0
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Income from Operations 193 301
Interest Income 28 36
Interest Expense (109) --
------- -------
Income before Provision for Income Taxes 112 337
Provision for Income Taxes 34 121
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Net Income $ 78 $ 216
======= =======
Basic Earnings Per Share $ 0.06 $ 0.16
======= =======
Diluted Earnings Per Share $ 0.06 $ 0.16
======= =======
Common Shares Outstanding 1,368 1,350
======= =======
Common Shares Outstanding,
Assuming Dilution 1,412 1,381
======= =======
See accompanying notes to Condensed Consolidated Financial Statements
5
Benthos, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flow
(in thousands)
(unaudited)
Thirteen Weeks Ended
December 31, 1999 December 31, 1998
----------------- -----------------
Cash Flows From Operating Activities:
Net Income $ 78 $ 216
Adjustments to Reconcile Net Income to Net Cash (Used In)
Provided by Operating Activities:
Depreciation and Amortization 347 160
Changes in Assets and Liabilities:
Accounts Receivable (1,006) (175)
Inventories 513 (251)
Prepaid Expenses and Other Current Assets (42) 152
Accounts Payable & Accrued Expenses (568) (46)
Customer Deposits (144) 13
------- -------
Net Cash (Used In) Provided by Operating Activities (822) 69
Cash Flows from Investing Activities:
Purchases of Property, Plant & Equipment (105) (18)
(Increase) Decrease in Other Assets (70) 12
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Net Cash by Used in Investing Activities (175) (6)
Cash Flows from Financing Activities:
Payments on long-term debt, net (197) ---
------- -------
Net (Decrease) Increase in Cash and Cash Equivalents (1,194) 63
Cash and Cash Equivalents, Beginning of Period 2,930 2,509
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Cash and Cash Equivalents, End of Period $ 1,736 $ 2,572
======= =======
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 105 $ ---
======= =======
Income Taxes Paid, Net of Refunds $ 100 $ 29
======= =======
Supplemental Disclosure of Noncash Activities:
Issuance of Treasury Stock to the Company's ESOP $ 74 $ 42
======= =======
See accompanying notes to Condensed Consolidated Financial Statements
6
Benthos, Inc. and Subsidiary
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 each year.
Interim quarters are comprised 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, 1999, 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) which 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 1999 financial statements to conform with the 2000 presentation.
3. Acquisition
On August 19, 1999, the Company acquired substantially all of the assets and
assumed certain liabilities of Datasonics, Inc. for approximately $6,732,
including acquisition costs. The acquisition was accounted for using the
purchase method of accounting in accordance with Accounting Principles Board
Opinion No. 16. Accordingly, the results of the operations of Datasonics have
been included in the accompanying consolidated financial statements from the
date of acquisition.
Unaudited pro forma operating results for the Company, assuming the Acquisition
of Datasonics occurred on October 1, 1998 are as follows:
Three Months Ended
December 31,
1998
Pro forma net sales $5,973
=====
Pro forma net income $181
===
Pro forma net income per share -
Basic $.13
===
Diluted $.13
===
7
4. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of the following:
December 31, 1999 September 30, 1999
----------------- ------------------
Raw Materials $ 613 $ 891
Work-in-Process 3,607 3,861
Finished Goods 61 42
----- -----
$4,281 $4,794
======= ======
5. Earnings Per Share
Basic earnings per share excludes dilution and is computed by dividing net
earnings by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock. Diluted earnings per share is computed based upon
the weighted average number of common shares and dilutive common equivalent
shares outstanding. Common stock options have a dilutive effect on earnings per
share in all periods and are therefore included in the computation of diluted
earnings per share. The Company has stock options for 135 shares of common stock
at an average exercise price of $11.69 in the thirteen week period ended
December 31, 1999 and had options for 92 shares of common stock at an average
exercise price of $13.60 in the thirteen week period ended December 31, 1998,
which have not been included in basic or diluted earnings per share as they are
antidilutive.
A reconciliation of basic and diluted shares outstanding is as follows:
Thirteen Weeks Ended December 31,
1999 1998
----- -----
Weighted average common shares outstanding 1,368 1,350
Potential common shares pursuant to stock options 44 31
----- -----
Diluted weighted average shares 1,412 1,381
===== =====
8
6. Segment Reporting
The Company views its operations and manages its business as two segments,
Undersea Systems and Container 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.
Thirteen Weeks Ended December 31,
1999 1998
------- -------
Sales to Unafilliated Customers:
Undersea Systems $ 4,076 $ 3,097
Container Inspection Systems 1,335 738
-------- --------
Total 5,411 3,835
Income (Loss) From Operations:
Undersea Systems 213 451
Container Inspection Systems (20) (150)
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Total 193 301
Identifiable Assets:
Undersea Systems 11,317 5,099
Container Inspection Systems 2,488 2,052
Corporate Assets 4,226 3,706
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Total $ 18,031 $ 10,857
Revenues by geographic area for thirteen weeks ended December 31, 1999 and 1998
were as follows:
Geographic Area 1999 1998
------- -------
United States $3,159 $1,347
Japan 693 348
Norway 240 671
Singapore -- 322
United Kingdom 278 691
Other 1,041 456
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Total $5,411 $3,835
9
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(Dollars in Thousands)
Results of Operations -- First quarter of fiscal year 2000 compared with first
quarter of fiscal year 1999.
The following table presents, for the periods indicated, the percentage
relationship of Condensed Consolidated Statements of Earnings items to total
sales:
Thirteen Weeks Ended
December 31, 1999 December 31, 1998
----------------- -----------------
(unaudited)
Net Sales 100.0% 100.0%
Cost of Sales 60.7% 61.1%
-------------- --------------
Gross Profit 39.3% 38.9%
Selling, General & Administrative Expenses 24.8% 23.6%
Research and Development Expenses 8.6% 7.4%
Amortization of Goodwill and Other
Acquired Intangibles 2.3% --
-------------- --------------
Income from Operations 3.6% 7.9%
Interest Income .5% .9%
Interest Expense (2.0)% --
-------------- --------------
Income Before Provision for Income Taxes 2.1% 8.8%
Provision for Income Taxes .6% 3.2%
-------------- --------------
Net Income 1.5% 5.6%
============== ==============
Sales. Net sales increased by 41.1% in the first quarter of fiscal year 2000 to
$5,411 as compared to $3,835 in the first quarter of fiscal year 1999. Sales of
the Undersea Systems Division increased by 31.6% to $4,076 in the first quarter
of fiscal year 2000 as compared to $3,097 in the first quarter of fiscal year
1999. The increase resulted mainly from the inclusion of the sales of the
product lines acquired from Datasonics, Inc. in August 1999 which were not in
the results of the first quarter of fiscal year 1999 and reduced sales of
hydrophones in the first quarter of fiscal year 2000 as compared to the first
quarter of fiscal year 1999. Sales of the Container Inspection Systems Division
increased by 80.9% to $1,335 in the first quarter of fiscal year 2000 as
compared to $738 in the first quarter of fiscal year 1999. The increase resulted
largely from the timing of market orders.
Gross Profit. Gross Profit increased by 42.5% to $2,125 for the first quarter of
fiscal year 2000 as compared to $1,491 for the first quarter of fiscal year
1999. As a percentage of sales, gross profit was 39.3% in the first quarter of
fiscal year 2000 as compared to 38.9% in the first quarter of fiscal year 1999.
The increase in gross profit percentage is attributed primarily to the higher
sales mix of Container Inspection Systems Division products, which carry a
higher gross profit than the products of the Undersea Systems Division.
10
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 48.6% to $1,345 for the first quarter of
fiscal year 2000 as compared to $905 in the first quarter of fiscal year 1999.
As a percentage of sales, selling, general and administrative expenses increased
to 24.8% in the first quarter of fiscal year 2000 as compared to 23.6% for the
first quarter of fiscal year 1999. The increase in selling, general, and
administrative dollars and percentage of sales is a result of the inclusion of
expenses related to the acquisition of Datasonics, Inc. in August 1999 which
were not in the results of the first quarter of fiscal year 1999 and other
corporate expenses.
Research and Development Expenses. Research and development expenses increased
62.8% to $464 for the first quarter of fiscal year 2000 as compared to $285 in
the first quarter of fiscal year 1999. As a percentage of sales, research and
development expenses increased to 8.6% of sales in the first quarter of fiscal
year 2000 from 7.4% in the first quarter of fiscal year 1999. The increase in
the overall level of expenditures is due to investments in new product
development as well as the inclusion of the operating results of the acquisition
of Datasonics, Inc. in August 1999 which were not included in the results of the
first quarter of fiscal year 1999. The level of expenditures is consistent with
the Company's current operational plans.
Amortization of Goodwill and Other Acquired Intangibles. Amortization of
goodwill and other acquired intangibles was $123 in the first quarter of fiscal
year 2000 as a result of the acquisition of substantially all of the assets of
Datasonics, Inc. in August 1999.
Interest Income. Interest income decreased to $28 in the first quarter of fiscal
year 2000 as compared to $36 in the first quarter of fiscal year 1999. The
decrease in interest income was a result of lower invested cash balances, due in
part to the acquisition of Datasonics, Inc.
Interest Expense. Interest Expense increased to $109 in the first quarter of
fiscal year 2000 as compared to $0 in the first quarter of fiscal year 1999. The
increase in interest expense dollars was a result of the bank loan made in
August 1999 to finance the acquisition of substantially all of the assets of
Datasonics, Inc.
Provision for Income Taxes. The provision for income taxes decreased to $34 in
the first quarter of fiscal year 2000 as compared to $121 in the first quarter
of fiscal year 1999. The effective tax rate used in the first quarter of fiscal
year 2000 was 30.0% as compared to the rate of 35.9% used in the first quarter
of fiscal year 1999. The rate used in the first quarter of fiscal year 2000 is
lower than the statutory rate due primarily to the benefit from the Company's
Foreign Sales Corporation.
Liquidity and Capital Resources. The Company's cash and cash equivalents
decreased $1,194 from September 30, 1999 to December 31, 1999. Cash of $822 was
used in operating activities. Inventories provided $513 as inventory levels were
more balanced with respect to shipments. Accounts receivable increased by $1,006
as a result of increased shipments and higher shipments in the latter part of
the quarter. Accounts payable and accrued expenses used $568 as a result of
profit sharing payments and inventory reduction. The Company has a $2,000
secured line of credit with a bank that was to have expired on January 31, 2000.
The bank has extended that line to March 31, 2000 and is in the process of
approving the extension to January 31, 2001. At December 31, 1999 there were no
amounts outstanding under this line of credit. The Company believes it is well
positioned to finance future working capital requirements and capital
expenditures during the next twelve months through cash on hand, current
earnings and available credit facilities.
YEAR 2000 UPDATE PROGRAM
The Company has monitored its Year 2000 program, and as of this date, no
material problems have arisen since the end of calendar year 1999. All of the
Company's computer systems are Year 2000 ready and no technology projects have
been delayed due to the Year 2000 date change.
11
During 1998 and 1999 the company was actively engaged in addressing Year 2000
issues.
State of Readiness: To manage its Y2K program, the Company divided its
efforts into four program areas:
- - Information Technology (computer hardware and software)
- - Physical Plant (manufacturing equipment and facilities)
- - Products (including product development)
- - Extended Enterprise (suppliers and customers)
For each of these program areas, the Company used a four-step approach:
- - Ownership (creating awareness, assigning tasks)
- - Inventory (listing items to be assessed for Y2K readiness)
- - Assessment (prioritizing the inventoried items, assessing their Y2K
readiness, planning corrective actions, developing initial contingency
plans)
- - Corrective Action Deployment (implementing corrective actions, verifying
implementation, finalizing and executing contingency plans.
Costs to Address Y2K Issues: The Company began incurring expenses in 1997 to
resolve this issue. All expenditures have been expensed as incurred and have not
had (and are not expected to have) a significant impact on the Company's ongoing
results of operations.
Risks of Y2K Issues and Contingency Plans: The Company assessed the Year 2000
issues relating to its physical plant, products and suppliers. The Company
developed a contingency planning process to mitigate worst-case business
disruptions such as delays in product delivery, which could potentially result
from events such as supply chain disruptions.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995.
The statements in this Quarterly Report on Form 10-QSB and in oral statements
which may be made by representatives of the Company relating to plans,
strategies, economic performance and trends and other statements that are not
descriptions of historical facts may be 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, economic cycles, availability of financing 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.
12
Part II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits set forth in the Exhibit Index on the following page are filed
herewith as a part of this report.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements 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.
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: February 9, 2000
BENTHOS, INC.
EXHIBIT INDEX
Exhibit
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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)
4.1 Common Stock Certificate (1)
10.1 Employment Contract with Samuel O. Raymond (1)
10.2 Amendment to Employment Contract with Samuel
O. Raymond (2)
10.3 Employment Contract with John L. Coughlin (1)
10.4 Amended and Restated Employment Agreement with
John L. Coughlin
10.5 Employee Stock Ownership Plan (1)
10.6 First Amendment to Employee Stock Ownership
Plan (2)
10.7 Second Amendment to Employee Stock Ownership
Plan (8)
10.8 Third Amendment to Employee Stock Ownership
Plan (8)
10.9 401(k) Retirement Plan (1993)(1)
10.10 401(k) Retirement Plan (1999)(8)
10.11 First Amendment to 401(k) Retirement Plan (2)
10.12 Second Amendment to 401(k) Retirement Plan (2)
10.13 Third Amendment to 401(k) Retirement Plan (3)
10.14 Supplemental Executive Retirement Plan (1)
10.15 1990 Stock Option Plan (1)
Exhibit
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10.16 Stock Option Plan for Non-Employee Directors (1)
10.17 1998 Non-Employee Directors' Stock Option Plan (4)
10.18 Benthos, Inc. 2000 Stock Incentive Plan (9)
10.19 License Agreement between the Company and The Penn
State Research Foundation dated December 13, 1993
(1)
10.20 Technical Consultancy Agreement between the
Company and William D. McElroy dated July 12, 1994
(1)
10.21 Technical Consultancy Agreement between the
Company and William D. McElroy dated October 1,
1996 (3)
10.22 General Release and Settlement Agreement between
the Company and Lawrence W. Gray dated February 8,
1996 (1)
10.23 Line of Credit Loan Agreement between the Company
and Cape Cod Bank and Trust Company dated
September 24, 1990, as amended (1)
10.24 Commercial Mortgage Loan Extension and
Modification Agreement between the Company and
Cape Cod Bank and Trust Company, dated July 6,
1994 (1)
10.25 Credit Agreement between the Company and Cape Cod
Bank and Trust Company dated August 18, 1999.
10.26 License Agreement between the Company and Optikos
Corporation dated July 29, 1997 (3)
10.27 Hydrophone License Agreement between the Company
and Syntron, Inc. dated December 5, 1996 (6)
10.28 Amendment Number 1 to Hydrophone License Agreement
between the Company and Syntron, Inc. dated
September 11, 1998 (6)
10.29 Asset Purchase Agreement among Benthos, Inc.,
Datasonics, Inc., and William L. Dalton and David
A. Porta (7)
21 Subsidiaries of the Registrant (1)
27 Financial Data Schedule
(1) Previously filed as an exhibit to Registrant's
Registration Statement on Form 10-SB filed with the Commission on
December 17, 1996 (File No. O-29024) and incorporated herein by this
reference.
(2) Previously filed as an exhibit to Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended March 30, 1997
(File No. O-29024) and incorporated herein by this reference.
(3) Previously filed as an exhibit to Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended June 29, 1997
(File No. O-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. O-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 Current
Report on Form 8-K filed on or about August 27, 1999 (File No. O-
29024) and incorporated herein by this reference.
(8) 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.
(9) Previously filed as an exhibit to the Registrant's
definitive proxy statement filed on Schedule 14A on or about January
18, 2000