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 March 31, 2002
[_] Transition report under Section 13 or 15(d) of the Exchange Act For the
transition period from ____________ to ______________
Commission file number 0-29024
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BENTHOS, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Massachusetts 04-2381876
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(State or Other Jurisdiction of (I. R. S. Employer
Corporation or Organization) Identification No.)
49 Edgerton Drive, North Falmouth, Massachusetts 02556
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(Address of Principal Executive Offices)
508-563-1000
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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
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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 1,383,082
- --------------------------------- -----------------------------------
(Class) (Outstanding stock at May 14, 2002)
Transitional Small Business Disclosure Format (check one):
Yes No X
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2
BENTHOS, INC. AND SUBSIDIARIES
FORM 10-QSB
FOR THE SECOND QUARTER AND SIX MONTHS ENDED
MARCH 31, 2002
INDEX
Page No.
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Face Sheet 1
Index 2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) 3
March 31, 2002 and
September 30, 2001
Condensed Consolidated Statements of Operations (unaudited) 4
Quarter and Six Months Ended
March 31, 2002 and
March 31, 2001
Condensed Consolidated Statements of Cash Flow (unaudited) 5
Six Months Ended
March 31, 2002 and
March 31, 2001
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 10
of Financial Condition and Results
of Operations
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BENTHOS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
March 31, 2002 September 30, 2001
-------------- ------------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 22 $ 46
Accounts Receivable, Net 2,900 2,723
Inventories 5,214 5,101
Prepaid Expenses and Other Current Assets 153 713
Deferred Tax Asset 1,650 1,650
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Total Current Assets 9,939 10,233
Property, Plant and Equipment, Net 1,568 1,810
Goodwill 2,657 2,657
Other Assets, Net 1,345 1,388
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$15,509 $16,088
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LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Portion of Long-Term Debt $ 786 $ 786
Line of Credit 125 500
Accounts Payable 2,554 1,520
Accrued Expenses 1,830 2,329
Customer Deposits 384 161
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Total Current Liabilities 5,679 5,296
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Long-Term Debt, Net of Current Portion 2,685 3,077
Stockholders' Investment:
Common stock, $.06 2/3 Par Value-
Authorized - 7,500 Shares
Issued - 1,653 Shares at March 31, 2002
and September 30, 2001 110 110
Capital in Excess of Par Value 1,569 1,569
Retained Earnings 6,097 6,667
Treasury Stock, at Cost (631) (631)
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Total Stockholders' Investment 7,145 7,715
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$15,509 $16,088
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See accompanying notes to Condensed Consolidated Financial Statements
4
BENTHOS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Quarter Ended Six Months Ended
March 31, March 31,
---------------- ----------------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales $ 3,670 $ 4,791 $ 8,313 $ 9,029
Cost of Sales 2,610 3,130 5,663 6,241
------- ------- ------- -------
Gross Profit 1,060 1,661 2,650 2,788
Selling, General &
Administrative Expenses 1,245 1,400 2,523 2,680
Research and Development
Expenses 465 590 693 1,098
Amortization of Goodwill -- 66 -- 132
Amortization of Acquired Intangibles 59 60 119 120
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Loss from Operations (709) (455) (685) (1,242)
Interest Income -- 6 -- 27
Interest Expense (65) (93) (130) (197)
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Loss before Benefit for Income Taxes (774) (542) (815) (1,412)
Benefit for Income Taxes (232) (162) (245) (423)
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Net Loss $ (542) $ (380) $ (570) $ (989)
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Basic and Diluted Loss Per Share $ (0.39) $ (0.28) $ (0.41) $ (0.72)
======= ======= ======= =======
Weighted Average Number of 1,383 1,382 1,383 1,380
Shares Outstanding ======= ======= ======= =======
See accompanying notes to Condensed Consolidated Financial Statements
5
BENTHOS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
(unaudited)
Six Months Ended
March 31,
----------------------
2002 2001
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Cash Flows from Operating Activities:
Net Loss $ (570) $ (989)
Adjustments to Reconcile Net Loss to
Net Cash Provided by (Used in) Operating
Activities: Depreciation and Amortization 415 601
Changes in Assets and Liabilities:
Accounts Receivable (177) 120
Inventories (113) (839)
Prepaid Expenses and Other Current Assets 560 79
Accounts Payable and Accrued Expenses 535 317
Customer Deposits 223 38
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Net Cash Provided by (Used in) Operating Activities 873 (673)
Cash Flows from Investing Activities:
Purchases of Property, Plant and Equipment (44) (325)
Increase in Other Assets (86) (82)
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Net Cash Used in Investing Activities (130) (407)
Cash Flows from Financing Activities:
(Payments) Borrowings on Line of Credit (375) 50
Payments on Long-Term Debt (392) (393)
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Net Cash Used in Financing Activities (767) (343)
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Net Decrease in Cash and Cash Equivalents (24) (1,423)
Cash and Cash Equivalents, Beginning of Period 46 1,474
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Cash and Cash Equivalents, End of Period $ 22 $ 51
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Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 129 $ 199
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Income Taxes Paid, Net of Refunds $ (680) $ 50
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Supplemental Disclosure of Noncash Activities:
Issuance of Treasury Stock to the Company's ESOP $ -- $ 30
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See accompanying notes to Condensed Consolidated Financial Statements
6
BENTHOS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED 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, 2001, 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.
3. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of the following:
March 31, 2002 September 30, 2001
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Raw Materials $ 217 $ 375
Work-in-Process 4,977 4,704
Finished Goods 20 22
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$ 5,214 $ 5,101
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4. Loss Per Share
A reconciliation of basic and diluted shares outstanding is as follows:
Quarter Ended Six Months Ended
March 31, March 31,
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2002 2001 2002 2001
---- ---- ---- ----
Basic weighted average common shares outstanding 1,383 1,382 1,383 1,380
Weighted average common share equivalents -- -- -- --
----- ----- ----- -----
Diluted weighted average shares outstanding 1,383 1,382 1,383 1,380
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7
The following securities were not included in computing earnings per share
because their effects would be anti-dilutive.
Quarter Ended Six Months Ended
March 31, March 31,
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2002 2001 2002 2001
---- ---- ---- ----
Options to purchase common stock 383 254 360 278
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5. 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.
Quarter Ended Six Months Ended
March 31, March 31,
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2002 2001 2002 2001
---- ---- ---- ----
Sales to Unaffiliated Customers:
Undersea Systems $ 1,975 $ 3,499 $ 4,991 $ 6,449
Package Inspection Systems 1,695 1,292 3,322 2,580
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Total $ 3,670 $ 4,791 $ 8,313 $ 9,029
======= ======= ======= =======
Income (Loss) from Operations:
Undersea Systems $ (790) $ (391) $ (901) $ (976)
Package Inspection Systems 81 (64) 216 (266)
------- ------- ------- -------
Total $ (709) $ (455) $ (685) $(1,242)
======= ======= ======= =======
Identifiable Assets:
Undersea Systems $10,914 $11,693
Package Inspection Systems 2,239 3,275
Corporate Assets 2,356 1,951
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Total $15,509 $16,919
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Revenues by geographic area were as follows:
Quarter Ended Six Months Ended
March 31, March 31,
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2002 2001 2002 2001
---- ---- ---- ----
Geographic Area
United States $ 2,224 $ 3,343 $ 6,057 $ 6,287
Other 1,446 1,448 2,256 2,742
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Total $ 3,670 $ 4,791 $ 8,313 $ 9,029
======= ======= ======= =======
8
Revenues by product line within the Undersea Systems segment were as follows:
Quarter Ended Six Months Ended
March 31, March 31,
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2002 2001 2002 2001
---- ---- ---- ----
Product Line: ------- ------- ------- -------
Underwater Acoustics $ 686 $ 1,642 $ 1,576 $ 3,192
Geophysical Exploration Equipment 889 1,410 2,413 2,472
Other Undersea Products 400 447 1,002 785
------- ------- ------- -------
Total $ 1,975 $ 3,499 $ 4,991 $ 6,449
======= ======= ======= =======
The Package Inspection Systems segment has only one product line.
6. 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 $800 line of credit. The
term note is payable in 84 consecutive equal monthly installments of principal
with interest at prime (4.75% at March 31, 2002) plus 2%, or 7%, whichever is
higher. As of March 31, 2002, $3,471 was outstanding under the term loan. The
term note matures in August 2006. The line of credit expires on January 31,
2003. Borrowings under the line of credit are payable as follows: monthly
payments of interest only and unpaid principal and accrued and unpaid interest
at maturity. The interest rate under the line of credit is either prime (4.75%
at March 31, 2002) plus 2%, or 7%, whichever is higher. Advances are limited to
45% of eligible accounts receivable. The availability under the line of credit
was $616 as of March 31, 2002. There were $125 in advances outstanding under the
line of credit as of March 31, 2002. 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 March 31, 2002, the
Company was not in compliance with the three financial covenants under this
credit facility. In April of 2002, the Company obtained a waiver of these
defaults. The Company believes that, based on its performance in the month of
April and on its internal forecasts for the third and fourth fiscal quarters of
2002, it will be in compliance with the financial covenants for the remainder of
fiscal 2002 and will not need any additional waivers from the bank. Therefore,
the Company has classified the debt outstanding under the term note that is due
after March 31, 2003 as long term in the accompanying financial statements. The
maximum amount available under the secured line of credit became $600 on
April 1, 2002.
7. New Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations. SFAS No. 141 addresses changes in the financial
accounting and reporting for business combinations and supersedes APB Opinion
No. 16, Business Combinations, and SFAS No. 38, Accounting for Pre-acquisition
Contingencies of Purchased Enterprises. Effective July 1, 2001, all business
combinations should be accounted for using only the purchase method of
accounting.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". This statement applies to goodwill and intangible assets acquired after
June 30, 2001, as well as goodwill and intangible assets previously acquired.
Under this statement, goodwill as well as certain other intangible assets,
determined to have an infinite life, will no longer be amortized. Such
intangible assets will be reviewed for impairment on a periodic basis. Early
adoption of this statement is permitted for companies with fiscal years
beginning after March 15, 2001 and whose first interim period financial
statements have not been issued. Pursuant to this statement, the Company elected
early adoption during the first fiscal quarter ended December 31, 2001.
Accordingly, the goodwill associated with the Datasonics acquisition is no
longer subject to amortization. Such goodwill is subject to an annual assessment
for impairment by applying a fair-value based test. In the second quarter of
fiscal 2002, the Company completed its initial evaluation of its goodwill by
comparing the fair value of its reporting units, as determined by an independent
appraiser, to the reporting unit's book value. The evaluation determined that no
impairment of goodwill existed as fair value exceeded book value for all
reporting units.
9
Aggregate amortization expense related to acquired intangibles which continue to
be amortized for the quarter and six months ended March 31, 2002 was $59 and
$119, respectively.
In the quarter ended March 31, 2001, the Company amortized $66 related to
goodwill. Excluding this amortization, the reported loss, net of taxes, would
have been reduced by $46. The basic and diluted loss per share would have
otherwise been $(0.25). For the six months ended March 31, 2001, the Company
amortized $132 related to goodwill. Excluding this amortization, the reported
loss, net of taxes, would have been reduced by $92. The basic and diluted loss
per share would have otherwise been $(0.65).
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement applies to all entities. It
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees. This
Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company believes that this statement will not
have a material impact on its results of operations and financial position.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement supersedes FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. Under this statement
it is required that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and it
broadens the presentation of discontinued operations to include more disposal
transactions. The provisions of this statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early adoption permitted. The
Company is currently evaluating the ultimate impact of this statement on its
results of operations and financial position until such time as its provisions
are applied.
8. Comprehensive Loss
SFAS No. 130, Reporting Comprehensive Income, requires disclosure of all
components of comprehensive loss. Comprehensive 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 loss other than net loss.
10
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Critical Accounting Policies
The preparation of our financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, expenses and related disclosures. On an on-going basis, we evaluate
our estimates and assumptions, including but not limited to those related to
revenue recognition, inventory valuation, warranty reserves and the impairment
of long-lived assets, goodwill and other intangible assets. We base our
estimates on historical experience and various other assumptions that we believe
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
The Company recognizes revenue from product sales upon shipment, provided that a
purchase order has been received or a contract has been executed, there are no
uncertainties regarding customer acceptance, the sales price is fixed or
determinable and collection is deemed probable. If uncertainties regarding
customer acceptance exist, the Company recognizes revenue when those
uncertainties are resolved. Amounts collected or billed prior to satisfying the
above revenue recognition criteria are recorded as deferred revenue.
2. Inventory Valuation
We value our inventory at the lower of our actual cost or the current estimated
market value. We regularly review inventory quantities on hand and inventory
commitments with suppliers and record a provision for excess and obsolete
inventory based primarily on our historical usage for the prior twelve to
twenty-four month period. Although we make every effort 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 product returned to us
during such warranty period at no cost to the customer. We record an estimate
for warranty-related costs based on our actual historical 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 our products, could have
a material adverse impact on future operating results for the period or periods
in which such returns or additional costs materialize and thereafter.
4. Goodwill
The goodwill associated with the Datasonics acquisition is subject to an annual
assessment for impairment by applying a fair-value based test. In the second
quarter of fiscal 2002, the Company completed its initial evaluation of its
goodwill by comparing the fair value of its reporting units, as determined by an
independent appraiser, to the reporting unit's book value. The valuation
determined that no impairment of goodwill existed as fair value exceeded book
value for all reporting units. 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 our best estimate of future
markets and operating conditions, and are continuously reviewed based on actual
operating trends. Actual results may differ from these estimates. In addition,
the relevancy of recent transactions used to establish market value for our
reporting units is based upon management's judgement.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands)
Results of Operations -- Second quarter of fiscal year 2002 compared with second
quarter of fiscal year 2001.
The following table presents, for the periods indicated, the percentage
relationship of Condensed Consolidated Statements of Operations items to total
sales:
Quarter Ended
-------------------------------------------------
March 31, 2002 March 31, 2001
-------------- --------------
(unaudited)
Net Sales 100.0 % 100.0 %
Cost of Sales 71.1 % 65.3 %
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Gross Profit 28.9 % 34.7 %
Selling, General & Administrative Expenses 33.9 % 29.2 %
Research and Development Expenses 12.7 % 12.3 %
Amortization of Goodwill -- % 1.4 %
Amortization of Acquired Intangibles 1.6 % 1.3 %
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Loss from Operations (19.3)% (9.5)%
Interest Income -- % .1 %
Interest Expense (1.8)% (1.9)%
------- --------
Loss Before Benefit for Income Taxes (21.1)% (11.3)%
Benefit for Income Taxes (6.3)% (3.4)%
------- --------
Net Loss (14.8)% (7.9)%
======= ========
The following table presents, for the periods indicated, the sales of the
product categories within the Undersea Systems segment:
Quarter Ended
-------------------------------------------------
March 31, 2002 March 31, 2001
-------------- --------------
(unaudited)
Underwater Acoustics $ 686 $ 1,642
Geophysical Exploration Equipment 889 1,410
Other Undersea Products 400 447
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Total Undersea Systems Sales $ 1,975 $ 3,499
======= ========
The Package Inspection Systems segment has only one product line.
12
Sales. Net sales decreased by 23.4% in the second quarter of fiscal year 2002 to
$3,670 as compared to $4,791 in the second quarter of fiscal year 2001. Sales of
the Package Inspection Systems Division increased by 31.2% to $1,695 in the
second quarter of fiscal year 2002 as compared to $1,292 in the second quarter
of fiscal year 2001. The increase resulted largely from increased market
penetration and new product introductions in the second quarter of fiscal year
2002. Sales of the Undersea Systems Division decreased by 43.6% to $1,975 in the
second quarter of fiscal year 2002 as compared to $3,499 in the second quarter
of fiscal year 2001. This decrease was experienced in the majority of the
product lines within the Undersea Systems Division and is a result of fewer
large project orders, decreased demand for geophysical hydrophones for use in
exploration by the oil and gas industries, transition from a distributor of the
locator products in the Underwater Acoustics line and the effects of the tragic
events of September 11, 2001 on purchases of these products by the airline
industry as compared with the second quarter of fiscal year 2001. The sales for
side scan sonar equipment within the Geophysical Exploration Equipment product
line was up 30.3% as a result of increased purchases of this equipment by the
U.S. Navy and other customers as compared to the second quarter of fiscal year
2001.
Gross Profit. Gross Profit decreased by 36.2% to $1,060 for the second quarter
of fiscal year 2002 as compared to $1,661 for the second quarter of fiscal year
2001. As a percentage of sales, gross profit was 28.9% in the second quarter of
fiscal year 2002 as compared to 34.7% in the second quarter of fiscal year 2001.
The decrease in gross profit percentage is attributed primarily to unabsorbed
overhead resulting from decreased sales volume and offset by $130 in reduced
inventory and warranty provisions and increased sales of the products of the
Package Inspection Division which are more profitable than those of the Undersea
Systems Division. The Company believes that there will be an improvement in its
gross profit in the third quarter of fiscal year 2002 based on record shipments
in excess of $3,000 in the month of April 2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by 11.1% to $1,245 for the second quarter of
fiscal year 2002 as compared to $1,400 in the second quarter of fiscal year
2001. As a percentage of sales, selling, general and administrative expenses
increased to 33.9% in the second quarter of fiscal year 2002 as compared to
29.2% for the second quarter of fiscal year 2001. The decrease in selling,
general, and administrative dollars is primarily a result of $151 in expenses
related to the resignation of the former CEO in the second quarter of fiscal
year 2001 that were not repeated in the second quarter of fiscal year 2002 and
reduced headcount compared to that quarter. The increase in percentage of sales
is a result of reduced sales.
Research and Development Expenses. Research and development expenses decreased
21.2% to $465 for the second quarter of fiscal year 2002 as compared to $590 in
the second quarter of fiscal year 2001. As a percentage of sales, research and
development expenses increased to 12.7% of sales in the second quarter of fiscal
year 2002 from 12.3% in the second quarter of fiscal year 2001. The decrease in
the overall level of expenditures is a result of the completion in fiscal year
2001 of several development projects that were active in the second quarter of
fiscal year 2001, the elimination of certain outside costs that existed in the
second quarter of fiscal year 2001, and the temporary reassignment of
engineering resources.
Amortization of Goodwill. As a result of the Company's early adoption of SFAS
No. 142, Goodwill and Other Intangible Assets, goodwill, as well as certain
other intangible assets determined to have an indefinite life, will no longer be
amortized. Such intangible assets will be subject to an annual assessment for
impairment by applying a fair-value based test. Early adoption of this statement
is permitted for companies with fiscal years beginning after March 15, 2001 and
whose first interim period financial statements have not been issued. Pursuant
to this statement, the Company elected early adoption during the first fiscal
quarter ended December 31, 2001. Accordingly, the goodwill associated with the
Datasonics acquisition is no longer subject to amortization. Such goodwill is
subject to an annual assessment for impairment by applying a fair-value based
test. In the second quarter of fiscal 2002, the Company completed its initial
evaluation of its goodwill by comparing the fair value of its reporting units,
as determined by an independent appraiser, to the reporting unit's book value.
The evaluation determined that no impairment of goodwill existed as fair value
exceeded book value for all reporting units.
13
Amortization of Acquired Intangibles. Amortization of acquired intangibles was
$59 in the second quarter of fiscal year 2002 and $60 in the second quarter of
fiscal year 2001. The amortization of other acquired intangibles relates to the
Datasonics acquisition in fiscal year 1999.
Interest Income. Interest income decreased to $0 in the second quarter of fiscal
year 2002 as compared to $6 in the second quarter of fiscal year 2001. The
decrease in interest income was a result of lower invested cash balances.
Interest Expense. Interest Expense decreased to $65 in the second quarter of
fiscal year 2002 as compared to $93 in the second quarter of fiscal year 2001.
The decrease in interest expense was a result of reduced principal on the
variable rate term loan used to finance the Datasonics acquisition and lower
interest rates.
Benefit for Income Taxes. The benefit for income taxes increased to $232 in the
second quarter of fiscal year 2002 as compared to $162 in the second quarter of
fiscal year 2001. The effective tax rate in the second quarter of fiscal years
2002 and 2001 was 30.0%. The rate is lower than the statutory rate due primarily
to the benefit from the Company's Foreign Sales Corporation.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands)
Results of Operations - Six months of fiscal year 2002 compared with six months
of fiscal year 2001.
The following table presents, for the periods indicated, the percentage
relationship of Condensed Consolidated Statements of Operations items to total
sales:
Six Months Ended
-------------------------------------------------
March 31, 2002 March 31, 2001
-------------- --------------
Net Sales 100.0 % 100.0%
Cost of Sales 68.1 % 69.1%
------- --------
Gross Profit 31.9 % 30.9%
Selling, General & Administrative Expenses 30.4 % 29.7%
Research and Development Expenses 8.3 % 12.2%
Amortization of Goodwill -- % 1.4%
Amortization of Acquired Intangibles 1.4 % 1.3%
------- --------
Loss from Operations (8.2)% (13.7)%
Interest Income -- % .3 %
Interest Expense (1.6)% (2.2)%
-------- --------
Loss Before Benefit for Income Taxes (9.8)% (15.6)%
Benefit for Income Taxes (2.9)% (4.7)%
------- --------
Net Loss (6.9)% (11.0)%
======= ========
The following table presents, for the periods indicated, the sales of the
product categories within the Undersea Systems segment:
Six Months Ended
-------------------------------------------------
March 31, 2002 March 31, 2001
-------------- --------------
(unaudited)
Underwater Acoustics $ 1,576 $3,192
Geophysical Exploration Equipment 2,413 2,472
Other Undersea Products 1,002 785
------- ------
Total Undersea Systems Sales $ 4,991 $6,449
======= ======
The Package Inspection Systems segment has only one product line.
Sales. Net sales decreased by 7.9% in the first six months of fiscal year 2002
to $8,313 as compared to $9,029 in the first six months of fiscal year 2001.
Sales of the Package Inspection Systems Division increased by 28.8% to $3,322 in
the first six months of fiscal year 2002 as compared to $2,580 in the first six
months of fiscal year 2001. The increase resulted largely from increased market
penetration and new
15
product introductions in the first six months of fiscal year 2002. Sales of the
Undersea Systems Division decreased by 22.6% to $4,991 in the first six months
of fiscal year 2002 as compared to $6,449 in the first six months of fiscal year
2001. This decrease was experienced in the majority of the product lines within
the Undersea Systems Division and is a result of fewer large project orders,
decreased demand for geophysical hydrophones for use in exploration by the oil
and gas industries, transition from a distributor of the locator products in the
Underwater Acoustics line and the effects of the tragic events of September 11,
2001 on purchases of these products by the airline industry as compared with the
first six months of fiscal year 2001. The sales for side scan sonar equipment
within the Geophysical Exploration Equipment product line were up 75.0% as a
result of increased purchases of this equipment by the U.S. Navy and other
customers as compared to the first six months of fiscal year 2001.
Gross Profit. Gross Profit decreased by 4.9% to $2,650 for the first six months
of fiscal year 2002 as compared to $2,788 for the first six months of fiscal
year 2001. As a percentage of sales, gross profit was 31.9% in the first six
months of fiscal year 2002 as compared to 30.9% in the first six months of
fiscal year 2001. The increase in gross profit percentage is attributed
primarily to the higher sales mix of Package Inspection Systems Division
products, which carry a higher gross profit than the products of the Undersea
Systems Division and $260 in reduced inventory and warranty provisions, offset
by increased unabsorbed overhead as a result of decreased sales volume as
compared to the first six months of fiscal year 2001.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by 5.8% to $2,523 for the first six months of
fiscal year 2002 as compared to $2,680 in the first six months of fiscal year
2001. As a percentage of sales, selling, general and administrative expenses
increased to 30.4% in the first six months of fiscal year 2002 as compared to
29.7% for the first six months of fiscal year 2001. The decrease in selling,
general and administrative expenses in dollars is a result of the reduced
headcount from the first six months of fiscal year 2001 and $151 in expenses
related to the resignation of the former CEO in the first six months of fiscal
year 2001, such as search fees for a successor and severance costs which were
not repeated in the first six months of fiscal year 2002. The increase in
percentage of sales is related to the decrease in sales volume.
Research and Development Expenses. Research and development expenses decreased
36.8% to $693 for the first six months of fiscal year 2002 as compared to $1098
in the first six months of fiscal year 2001. As a percentage of sales, research
and development expenses decreased to 8.3% of sales in the first six months of
fiscal year 2002 from 12.2% in the first six months of fiscal year 2001. The
decrease in the overall level of expenditures is a result of the completion in
fiscal year 2001 of several development projects that were active in first six
months of fiscal year 2001, the elimination of certain outside costs that
existed in the first six months of fiscal year 2001, and the temporary
reassignment of engineering resources.
Amortization of Goodwill. As a result of the Company's early adoption of SFAS
No. 142, Goodwill and Other Intangible Assets, goodwill, as well as certain
other intangible assets determined to have an indefinite life, will no longer be
amortized. Such intangible assets will be subject to an annual assessment for
impairment by applying a fair-value based test. Early adoption of this statement
is permitted for companies with fiscal years beginning after March 15, 2001 and
whose first interim period financial statements have not been issued. Pursuant
to this statement, the Company elected early adoption during the first fiscal
quarter ended December 31, 2001. Accordingly, the goodwill associated with the
Datasonics acquisition is no longer subject to amortization. Such goodwill is
subject to an annual assessment for impairment by applying a fair-value based
test. In the second quarter of fiscal 2002, the Company completed its initial
evaluation of its goodwill by comparing the fair value of its reporting units,
as determined by an independent appraiser, to the reporting unit's book value.
The evaluation determined that no impairment of goodwill existed as fair value
exceeded book value for all reporting units.
Amortization of Acquired Intangibles. Amortization of acquired intangibles was
$119 in the first six months of fiscal year 2002 and $120 in the first six
months of fiscal year 2001. The amortization of other acquired intangibles
relates to the Datasonics acquisition in fiscal year 1999.
16
Interest Income. Interest income decreased to $0 in the first six months of
fiscal year 2002 as compared to $27 in the first six months of fiscal year 2001.
The decrease in interest income was a result of lower invested cash balances.
Interest Expense. Interest expense was $130 in the first six months of fiscal
year 2002 as compared to $197 in the first six months of fiscal year 2001. The
decrease in interest expense was a result of reduced principal on the variable
rate term loan used to finance the Datasonics acquisition and lower interest
rates.
Benefit for Income Taxes. The benefit for income taxes decreased to $245 in the
first six months of fiscal year 2002 as compared to $423 in the first six months
of fiscal year 2001. The effective tax rate in the first halves of fiscal years
2002 and 2001 was 30.0%. The rate 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 $24 from September 30, 2001 to March 31, 2002. Cash of $873 was
provided by operating activities, primarily the result of changes in operational
assets and liabilities plus depreciation and amortization and offset by the net
loss incurred during the first six months of fiscal year 2002. The Company also
used $130 and $767 of cash in its investing and financing activities,
respectively. Investing activities represent primarily the purchase of capital
equipment and a payment on a split-dollar life insurance policy and financing
activities represent the payment of the installment payments on the term note
and partial repayment under the revolving note.
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 $800 line of credit. The
term note is payable in 84 consecutive equal monthly installments of principal
with interest at prime (4.75% at March 31, 2002) plus 2%, or 7%, whichever is
higher. The term note matures in August 2006. The line of credit expires on
January 31, 2003. Borrowings under the line of credit are payable as follows:
monthly payments of interest only and unpaid principal and accrued and unpaid
interest at maturity. The interest rate under the line of credit is either prime
(4.75% at March 31, 2002) plus 2%, or 7%, whichever is higher. Advances are
limited to 45% of eligible accounts receivable. The availability under the line
of credit was $616 as of March 31, 2002. There were $125 in advances outstanding
under the line of credit as of March 31, 2002. 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 March 31, 2002, the
Company was not in compliance with the three financial covenants. In April of
2002, the Company obtained a waiver of these defaults. The Company believes
that, based on its performance in the month of April and on its internal
forecasts for the third and fourth fiscal quarters of 2002, it will be in
compliance with the financial covenants for the remainder of fiscal 2002 and
will not need any additional waivers from the bank. The maximum amount available
under the secured line of credit became $600 on April 1, 2002.
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 and available credit facilities.
17
"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.
18
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: May 15, 2002
BENTHOS, INC.
EXHIBIT INDEX
Exhibit
- -------
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)
10.5 Severance Agreement with John L. Coughlin (13)
10.6 Employment Agreement with Ronald L. Marsiglio dated May 21, 2001 (15)
10.7 Employment Agreement with Francis E. Dunne, Jr. (11)
10.8 Employee Stock Ownership Plan (1)
10.9 First Amendment to Employee Stock ownership Plan (2)
10.10 Second Amendment to Employee Stock ownership Plan (8)
10.11 Third Amendment to Employee Stock Ownership Plan (8)
10.12 Fourth Amendment to Employee Stock Ownership Plan (11)
10.13 Fifth Amendment to Employee Stock Ownership Plan (11)
10.14 401(k) Retirement Plan (1993) (1)
10.15 First Amendment to 401(k) Retirement Plan (2)
10.16 Second Amendment to 401(k) Retirement Plan (2)
10.17 Third Amendment to 401(k) Retirement Plan (3)
10.18 401(k) Retirement Plan (1999) (8)
10.19 First Amendment to 1999 401(k) Retirement Plan (11)
10.20 Second Amendment to 1999 401(k) Retirement Plan (11)
10.21 Third Amendment to 1999 401(k) Retirement Plan (14)
10.22 Supplemental Executive Retirement Plan (1)
10.23 1990 Stock Option Plan (1)
10.24 Stock Option Plan for Non-Employee Directors (1)
10.25 1998 Non-Employee Directors' Stock Option Plan (4)
10.26 Benthos, Inc. 2000 Stock Incentive Plan (9)
10.27 License Agreement between the Company and The Penn State Research
Foundation dated December 13, 1993 (1)
10.28 Technical Consultancy Agreement between the Company and William D.
McElroy dated July 12, 1994 (1)
10.29 Technical Consultancy Agreement between the Company and William D.
McElroy dated October 1, 1996 (3)
10.30 General Release and Settlement Agreement between the Company and
Lawrence W. Gray dated February 8, 1996 (1)
10.31 Line of Credit Loan Agreement between the Company and Cape Cod Bank and
Trust Company dated September 24, 1990, as amended (1)
10.32 Commercial Mortgage Loan Extension and Modification Agreement between
the Company and Cape Cod Bank and Trust Company, dated July 6, 1994 (1)
10.33 Credit Agreement between the Company and Cape Cod Bank and Trust
Company dated August 18, 1999 (8)
10.34 First Amendment to Credit Agreement dated March 23, 2001 (14)
10.35 Second Amendment to Credit Agreement dated December 12, 2001 (17)
10.36 License Agreement between the Company and Optikos Corporation dated
July 29, 1997 (3)
10.37 Hydrophone License Agreement between the Company and Syntron, Inc.
dated December 5, 1996 (6)
10.38 Amendment Number 1 to Hydrophone License Agreement between the Company
and Syntron, Inc. dated September 11, 1998 (6)
10.39 Asset Purchase Agreement among Benthos, Inc., Datasonics, Inc., and
William L. Dalton and David A. Porta (7)
10.40 Settlement Agreement and Mutual Release dated October 18, 2001 between
the Company and RJE International, Inc. (16)
10.41 Amendment and Termination of Consulting Agreement between the Company
and William D. McElroy dated February 15, 2002
21 Subsidiaries of the Registrant (1)
(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. 0-29024) 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.
0-29024) 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. 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 Current Report on
Form 8-K filed on or about August 27, 1999 (File No. 0-29024) 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 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 December 31, 1999
(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 June 30, 2000 (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, 2000 (File No.
0-29024) and incorporated herein by this reference.
(13) Previously filed as an exhibit to Amendment No. 1 to the
Registrant's Annual Report on Form 10-QSB for the fiscal year ended
September 30, 2000 (File No. 0-29024) and incorporated herein by this
reference.
(14) 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.
(15) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended June 30, 2001 (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, 2001 (File No.
0-29024) and incorporated herein by this reference.
(17) 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.