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, 1998
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[ ] 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.
(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 $.0667 1,352,302
(Class) (Outstanding stock at February 5, 1999)
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
2
BENTHOS, INC. AND SUBSIDIARY
FORM 10-QSB
FOR THE THIRTEEN WEEKS ENDED
DECEMBER 31, 1998
INDEX
Page No.
Face Sheet 1
Index 2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) 3
December 31, 1998 and
September 30, 1998
Condensed Consolidated Statements of Earnings
(unaudited) 4
Thirteen Weeks Ended
December 31, 1998 and
December 31, 1997
Condensed Consolidated Statements of Cash Flow
(unaudited) 5
Thirteen Weeks Ended
December 31, 1998 and
December 31, 1997
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis 8-10
of Financial Condition and Results
of Operations
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signature 11
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, 1998 September 30, 1998
Current Assets:
Cash and Cash Equivalents $ 2,572 $2,509
Accounts Receivable, Net 1,784 1,609
Inventories 3,044 2,793
Prepaid Expenses and Other Current
Assets 478 630
Deferred Tax Asset 651 651
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Total Current Assets 8,529 8,192
Property, Plant and Equipment, Net 1,767 1,860
Other Assets 561 580
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$10,857 $10,632
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Liabilities and Stockholders'
Investment
Current Liabilities:
Accounts Payable $ 903 $ 990
Accrued Expenses 1,003 962
Customer Deposits 250 237
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Total Current Liabilities 2,156 2,189
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Stockholders' Investment:
Common Stock, $.0667 par value-
Authorized - 7,500 shares
Issued - 1,635 shares at
December 31, 1998
and September 30, 1998 109 109
Capital in Excess of Par Value 1,502 1,502
Retained Earnings 7,825 7,609
Treasury Stock, at Cost (735) (777)
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Total Stockholders' Investment 8,701 8,443
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$10,857 $10,632
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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, 1998 December 31, 1997
Net Sales $3,835 $3,120
Cost of Sales 2,344 1,325
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Gross Profit 1,491 1,795
Selling, General & Administrative
Expenses 905 1,240
Research and Development Expenses 285 270
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Income from Operations 301 285
Interest Income, Net 36 23
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Income before Provision for Income
Taxes 337 308
Provision for Income Taxes 121 118
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Net Income $ 216 $ 190
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Basic Earnings Per Share $0.16 $0.15
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Diluted Earnings Per Share $0.16 $0.14
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Common Shares Outstanding 1,350 1,293
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Common Shares Outstanding,
Assuming Dilution 1,381 1,394
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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, 1998 December 31, 1997
Cash Flows From Operating Activities:
Net Income $ 216 $ 190
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 160 186
Changes in Assets and Liabilities:
Accounts Receivable (175) 711
Inventories (251) (358)
Prepaid Expenses 152 123
Accounts Payable & Accrued Expenses (46) (153)
Customer Deposits 13 64
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Net Cash Provided by Operating Activities 69 763
Cash Flows from Investing Activities:
Purchases of Property, Plant & Equipment (18) (40)
Decrease (Increase) in Other Assets 12 (8)
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Net Cash by Used in Investing Activities (6) (48)
Cash Flows from Financing Activities:
Payments on long-term debt, net 0 (314)
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Net Increase in Cash and Cash Equivalents 63 401
Cash and Cash Equivalents, Beginning of Period 2,509 2,663
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Cash and Cash Equivalents, End of Period $2,572 $3,064
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Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 0 $ 16
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Income Taxes Paid $ 29 $ 20
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Supplemental Disclosure of Noncash Activities:
Sale of Treasury Stock to the Company's ESOP $ 42 $ 70
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See accompanying notes to Condensed Consolidated Financial Statements
6
Benthos, Inc.
Notes to Financial Statements
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, 1998, 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 1998 financial statements to conform with the 1999 presentation.
3. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of the following:
December 31, 1998 September 30, 1998
(in thousands)
Raw Materials $ 89 $ 81
Work-in-Process 2,944 2,702
Finished Goods 11 10
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$3,044 $2,793
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4. 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 91,500 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.
7
A reconciliation of basic and diluted shares outstanding is as follows:
(in thousands)
Thirteen Weeks Ended December 31,
1998 1997
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Weighted average common
shares outstanding 1,350 1,293
Potential common shares
pursuant to stock options 31 101
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Diluted weighted
average shares 1,381 1,394
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8
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 1999 compared with first
quarter of fiscal year 1998.
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, 1998 December 31, 1997
(unaudited)
Net Sales 100.0% 100.0%
Cost of Sales 61.1% 42.5%
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Gross Profit 38.9% 57.5%
Selling, General & Administrative
Expenses 23.6% 39.7%
Research and Development Expenses 7.4% 8.7%
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Income from Operations 7.9% 9.1%
Interest Income, Net .9% .8%
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Income Before Provision for Income
Taxes 8.8% 9.9%
Provision for Income Taxes 3.2% 3.8%
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Net Income 5.6% 6.1%
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Sales. Net sales increased by 22.9% in the first quarter of fiscal year 1999 to
$3,835 as compared to $3,120 in the first quarter of fiscal year 1998. Sales of
the Undersea Systems Division increased by 109% to $3,097 in the first quarter
of fiscal year 1999 as compared to $1,479 in the first quarter of fiscal year
1998. The increase resulted mainly from higher sales of hydrophones in the first
quarter of fiscal year 1999 as compared to the first quarter of fiscal year 1998
related to the Company's transition to its new Geopoint hydrophone product.
Sales of the Container Inspection Systems Division decreased by 55% to $738 in
the first quarter of fiscal year 1999 as compared to $1,641 in the first quarter
of fiscal year 1998. The decrease resulted largely from the timing of project
orders.
Cost of Sales. Cost of sales increased by 76.9% to $2,344 in the first quarter
of fiscal year 1999 as compared to $1,325 in the first quarter of fiscal year
1998. As a percentage of sales, cost of sales was 61.1% in the first quarter of
fiscal year 1999 as compared to 42.5% in the first quarter of fiscal year 1998.
The increase in the cost of sales dollars and percentage is attributed primarily
to the higher sales mix of the products of the Undersea Systems division which
carry a higher cost than the products of the Container Inspection Systems
Division.
9
Gross Profit. Gross Profit decreased by 16.9% to $1,491 for the first quarter of
fiscal year 1999 as compared to $1,795 for the first quarter of fiscal year
1998. As a percentage of sales, gross profit was 38.9% in the first quarter of
fiscal year 1999 as compared to 57.5% in the first quarter of fiscal year 1998.
The decrease in gross profit percentage is attributed primarily to the higher
sales mix of Undersea Systems Division products, which carry a lower gross
profit than the products of the Container Inspection Systems Division.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by 27.0% to $905 for the first quarter of
fiscal year 1999 as compared to $1,240 in the first quarter of fiscal year 1998.
As a percentage of sales, selling, general and administrative expenses decreased
to 23.6% in the first quarter of fiscal year 1999 as compared to 39.7% for the
first quarter of fiscal year 1998. This decrease in percentage of sales is
primarily a result of an increased level of sales in the first quarter of fiscal
year 1999, reduced selling expenses, and lower commission expenses in the
Container Inspection Systems Division which is a direct result of reduced sales
in that division as compared to the first quarter of fiscal year 1998.
Research and Development Expenses. Research and development expenses increased
5.6% to $285 for the first quarter of fiscal year 1999 as compared to $270 in
the first quarter of fiscal year 1998. As a percentage of sales, research and
development expenses decreased to 7.4% of sales in the first quarter of fiscal
year 1999 from 8.7% in the first quarter of fiscal year 1998. The increase in
the overall level of expenditures is due to investments in new product
development and is consistent with the Company's current operational plans.
Interest Income. Interest income, net increased to $36 in the first quarter of
fiscal year 1999 as compared to $23 in the first quarter of fiscal year 1998.
The increase in net interest income was a result of the Company having paid off
all the outstanding debt in fiscal 1998, offset by slightly lower interest rates
on invested capital.
Provision for Income Taxes. The provision for income taxes increased to $121 in
the first quarter of fiscal year 1999 as compared to $118 in the first quarter
of fiscal year 1998. The effective tax rate used in the first quarter of fiscal
year 1999 was 36.0% as compared to the rate of 38.3% used in the first quarter
of fiscal year 1998. The rate used in the first quarter of fiscal year 1999 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
increased $63 from September 30, 1998 to December 31, 1998. Cash of $69 was
provided by operating activities. Inventories used $251 to support future
sales. Accounts receivable increased by $175 as a result of increased shipments
in the latter part of the quarter. Prepaid expenses decreased $152. 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 Issues. During 1998 and 1999, the company has been actively engaged
in addressing Year 2000 ("Y2K") issues, which result from the use of two-digit,
rather than four-digit, year dates in software, a practice which could cause
date-sensitive systems to malfunction or fail because they may not recognize or
process date information correctly.
STATE OF READINESS: To manage its Y2K program, the Company has 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)
10
For each of these program areas, the Company is using 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)
As of December 31, 1998, the Ownership and Inventory steps were essentially
complete for all program areas. The Company expects to complete the Assessment
and Corrective Action Deployment steps by June 1999.
COSTS TO ADDRESS Y2K ISSUES: The Company began incurring expenses in 1997 to
resolve this issue. All expenditures will be expensed as incurred 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 is in the process of
assessing the Year 2000 issues relating to its physical plant, products and
suppliers. The Company intends to develop 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.
The Company expects its contingency plans to be complete by June 1999.
"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.
11
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.
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Francis E. Dunne, Jr.
Chief Financial Officer
and Treasurer
(Principal Financial and
Accounting Officer)
DATE: February 5, 1999
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 Employee Stock Ownership Plan (1)
10.5 First Amendment to Employee Stock Ownership Plan (2)
10.6 401(k) Retirement Plan (1)
10.7 First Amendment to 401(k) Retirement Plan (2)
10.8 Second Amendment to 401(k) Retirement Plan (2)
10.9 Third Amendment to 401(k) Retirement Plan (3)
10.10 Supplemental Executive Retirement Plan (1)
10.11 1990 Stock Option Plan (1)
10.12 Stock Option Plan for Non-Employee Directors (1)
10.13 1998 Non-Employee Directors' Stock Option Plan (4)
10.14 License Agreement between the Company and The Penn State
Research Foundation dated December 13, 1993 (1)
10.15 Technical Consultancy Agreement between the Company and
William D. McElroy dated July 12, 1994 (1)
Exhibit
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10.16 Technical Consultancy Agreement between the Company and
William D. McElroy dated October 1, 1996 (3)
10.17 General Release and Settlement Agreement between the Company
and Lawrence W. Gray dated February 8, 1996 (1)
10.18 Line of Credit Loan Agreement between the Company and Cape
Cod Bank and Trust Company dated September 24, 1990, as
amended (1)
10.19 Commercial Mortgage Loan Extension and Modification
Agreement between the Company and Cape Cod Bank and Trust
Company, dated July 6, 1994 (1)
10.20 License Agreement between the Company and Optikos
Corporation dated July 29, 1997 (3)
10.21 Hydrophone License Agreement between the Company and
Syntron, Inc. dated December 5, 1996.
10.22 Amendment Number 1 to Hydrophone License Agreement between
the Company and Syntron, Inc. dated September 11, 1998.
21 Subsidiaries of the Registrant (1)
27 Financial Data Schedule
27.1 Restated Financial Data Schedule (1998)
(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.