-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PLluV8WFy8sV4b+3BVPN0sNDIOPLWaBDMNddjeoLUCrf3Nw0e+VMnF0dkTcF6SRq TpQsLlxtUbzTLwPow3zxdw== 0000927016-02-003974.txt : 20020812 0000927016-02-003974.hdr.sgml : 20020812 20020812164804 ACCESSION NUMBER: 0000927016-02-003974 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BENTHOS INC CENTRAL INDEX KEY: 0000011390 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS MANUFACTURING INDUSTRIES [3990] IRS NUMBER: 042381876 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-29024 FILM NUMBER: 02727263 BUSINESS ADDRESS: STREET 1: 49 EDGARTON DRIVE CITY: NORTH FALMOUTH STATE: MA ZIP: 02556 BUSINESS PHONE: 5085631000 MAIL ADDRESS: STREET 1: 49 EDGERTON DR CITY: NORTH FALMOUTH STATE: MA ZIP: 02556 10QSB 1 d10qsb.txt FORM 10QSB FROM 06/30/2002 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 June 30, 2002 [_] 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 (Address of Principal Executive Offices) 508-563-1000 Issuer's Telephone Number Including Area Code Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] State the number of shares outstanding of each of the issuer's classes of Common equity as of the latest practicable date: Common Stock par value $.06 2/3 1,383,082 (Class) (Outstanding stock at August 9, 2002) Transitional Small Business Disclosure Format (check one): Yes [_] No [X] 2 BENTHOS, INC. AND SUBSIDIARIES FORM 10-QSB FOR THE THIRD QUARTER AND NINE MONTHS ENDED JUNE 30, 2002 INDEX
Page No. Face Sheet 1 Index 2 PART I FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets (unaudited) 3 June 30, 2002 and September 30, 2001 Condensed Consolidated Statements of Operations (unaudited) 4 Quarter and Nine Months Ended June 30, 2002 and June 30, 2001 Condensed Consolidated Statements of Cash Flow (unaudited) 5 Nine Months Ended June 30, 2002 and June 30, 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 4. Submission of Matters to a Vote of Security Holders 18 Item 6. Exhibits and Reports on Form 8-K 19 Signatures 19 Statement Pursuant to 18 U.S.C. (S)1350 19
3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements Benthos, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in thousands) (unaudited) Assets June 30, 2002 September 30, 2001 ------------- ------------------ Current Assets: Cash and Cash Equivalents $ 141 $ 46 Accounts Receivable, Net 2,654 2,723 Inventories 4,106 5,101 Prepaid Expenses and Other Current Assets 99 713 Deferred Tax Asset 1,650 1,650 -------- -------- Total Current Assets 8,650 10,233 Property, Plant and Equipment, Net 1,619 1,810 Goodwill 2,657 2,657 Other Assets, Net 1,281 1,388 -------- -------- $ 14,207 $ 16,088 ======== ======== Liabilities and Stockholders' Investment Current Liabilities: Current Portion of Long-Term Debt $ 786 $ 786 Line of Credit -- 500 Accounts Payable 1,198 1,520 Accrued Expenses 1,918 2,329 Customer Deposits 323 161 -------- -------- Total Current Liabilities 4,225 5,296 -------- -------- Long-Term Debt, Net of Current Portion 2,488 3,077 -------- -------- Stockholders' Investment: Common stock, $.06 2/3 Par Value- Authorized - 7,500 Shares Issued - 1,653 Shares at June 30, 2002 and September 30, 2001 110 110 Capital in Excess of Par Value 1,569 1,569 Retained Earnings 6,446 6,667 Treasury Stock, at Cost - 270 shares at June 30, 2002 and September 30, 2001 (631) (631) -------- -------- Total Stockholders' Investment 7,494 7,715 -------- -------- $ 14,207 $ 16,088 ======== ======== 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 Nine Months Ended June 30, June 30, 2002 2001 2002 2001 ---------- ---------- --------- -------- Net Sales $ 6,132 $ 5,201 $ 14,445 $ 14,230 Cost of Sales 3,836 3,196 9,499 9,437 ---------- --------- -------- -------- Gross Profit 2,296 2,005 4,946 4,793 Selling, General & Administrative Expenses 1,374 1,528 3,897 4,208 Research and Development Expenses 304 300 997 1,398 Amortization of Goodwill -- 66 -- 198 Amortization of Acquired Intangibles 60 61 179 181 ---------- --------- -------- -------- Income (Loss) from Operations 558 50 (127) (1,192) Interest Income 2 -- 2 27 Interest Expense (62) (90) (192) (287) ---------- --------- -------- -------- Income (Loss) before Provision (Benefit) for Income Taxes 498 (40) (317) (1,452) Provision (Benefit) for Income Taxes 149 (13) (96) (436) ---------- --------- -------- -------- Net Income (Loss) $ 349 $ (27) $ (221) $ (1,016) ========== ========= ======== ======== Basic Earnings (Loss) Per Share $ 0.25 $ (0.02) $ (0.16) $ (0.74) ========== ========= ======== ======== Diluted Earnings (Loss) Per Share $ 0.25 $ (0.02) $ (0.16) $ (0.74) ========== ========= ======== ======== Weighted Average Common Shares Outstanding 1,383 1,383 1,383 1,381 ========== ========= ======== ======== Weighted Average Common Shares Outstanding, Assuming Dilution 1,416 1,383 1,383 1,381 ========== ========= ======== ========
See accompanying notes to Condensed Consolidated Financial Statements 5 Benthos, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flow (in thousands) (unaudited)
Nine Months Ended June 30, 2002 June 30, 2001 ----------------- ------------------ Cash Flows from Operating Activities: Net Loss $ (221) $ (1,016) Adjustments to Reconcile Net Loss to Net Cash Provided by (Used in) Operating Activities: Depreciation and Amortization 533 866 Changes in Assets and Liabilities: Accounts Receivable 69 (150) Inventories 995 (950) Prepaid Expenses and Other Current Assets 614 94 Accounts Payable and Accrued Expenses (733) 393 Customer Deposits 162 (127) -------- ---------- Net Cash Provided by (Used in) Operating Activities 1,419 (890) -------- ---------- Cash Flows from Investing Activities: Purchases of Property, Plant and Equipment (148) (373) Increase in Other Assets (87) (82) -------- ---------- Net Cash Used in Investing Activities (235) (455) -------- ---------- Cash Flows from Financing Activities: (Payments) Borrowings on Line of Credit (500) 500 Payments on Long-Term Debt (589) (589) -------- ---------- Net Cash Used in Financing Activities (1,089) (89) -------- ---------- Net Increase (Decrease) in Cash and Cash Equivalents 95 (1,434) Cash and Cash Equivalents, Beginning of Period 46 1,474 -------- ---------- Cash and Cash Equivalents, End of Period $ 141 $ 40 ======== ========== Supplemental Disclosure of Cash Flow Information: Interest Paid $ 191 $ 291 ======== ========== Income Taxes Paid, Net of Refunds $ (680) $ 81 ======== ========== Supplemental Disclosure of Noncash Activities: Issuance of Treasury Stock to the Company's ESOP $ -- $ 30 ======== ==========
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: June 30, 2002 September 30, 2001 --------------- --------------------- Raw Materials $ 373 $ 375 Work-in-Process 3,710 4,704 Finished Goods 23 22 -------- ------- $ 4,106 $ 5,101 ======== ======= 4. Income (Loss) Per Share A reconciliation of basic and diluted shares outstanding is as follows:
Quarter Ended Nine Months Ended June 30, June 30, 2002 2001 2002 2001 ------ ------ ------ ------ Basic weighted average common shares outstanding 1,383 1,383 1,383 1,381 Weighted average common share equivalents 33 -- -- -- ------ ------ ------ ------- Diluted weighted average shares outstanding 1,416 1,383 1,383 1,381 ====== ====== ====== ======
7 The following securities were not included in computing earnings per share because their effects would be non-dilutive. Quarter Ended Nine Months Ended June 30, June 30, 2002 2001 2002 2001 ----- ----- ----- ----- Options to purchase common stock 205 342 364 299 ===== ===== ===== ===== 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 Nine Months Ended June 30, June 30, 2002 2001 2002 2001 ---- ---- ---- ---- Sales to Unaffiliated Customers: Undersea Systems $ 4,669 $ 3,768 $ 9,660 $ 10,217 Package Inspection Systems 1,463 1,433 4,785 4,013 ------- ------- -------- -------- Total $ 6,132 $ 5,201 $ 14,445 $ 14,230 ======= ======= ======== ======== Income (Loss) from Operations: Undersea Systems $ 548 $ 33 $ (353) $ (908) Package Inspection Systems 10 17 226 (284) ------- ------- -------- -------- Total $ 558 $ 50 $ (127) $ (1,192) ======= ======= ======== ======== Identifiable Assets: Undersea Systems $ 9,410 $ 11,864 Package Inspection Systems 2,381 3,285 Corporate Assets 2,416 1,907 -------- -------- Total $ 14,207 $ 17,056 ======== ======== Revenues by geographic area were as follows: Quarter Ended Nine Months Ended June 30, June 30, 2002 2001 2002 2001 Geographic Area: ---- ---- ---- ---- United States $ 2,735 $ 3,138 $ 8,792 $ 9,425 Malaysia 2,183 -- 2,278 -- Other 1,214 2,063 3,375 4,805 -------- -------- -------- -------- Total $ 6,132 $ 5,201 $ 14,445 $ 14,230 ======== ======== ======== ======== 8 Revenues by product line within the Undersea Systems segment were as follows: Quarter Ended Nine Months Ended June 30, June 30, 2002 2001 2002 2001 Product Line: ---- ---- ---- ---- Underwater Acoustics $ 1,210 $ 1,594 $ 2,786 $ 4,786 Geophysical Exploration Equipment 891 1,713 3,304 4,185 Other Undersea Products 2,568 461 3,570 1,246 ---------- ---------- ---------- ---------- Total $ 4,669 $ 3,768 $ 9,660 $ 10,217 ========== ========== ========== ========== 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 $600 line of credit. The term note is payable in 84 consecutive equal monthly installments of principal with interest at prime (4.75% at June 30, 2002) plus 2%, or 7%, whichever is higher. As of June 30, 2002, $3,274 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 June 30, 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 $600 as of June 30, 2002. There were no advances outstanding under the line of credit as of June 30, 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. The Company was not in conformance with some of the covenants in the first two quarters of this fiscal year and received waivers from the bank. As of June 30, 2002, the Company was in compliance with the three financial covenants under this credit facility. The Company believes that, based on its internal forecasts, it will remain in compliance with the financial covenants. Therefore, the Company has classified the debt outstanding under the term note that is due after June 30, 2003 as long-term in the accompanying financial statements. 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 fiscal year-end companies with fiscal years beginning after March 15, 2001 and whose first interim period financial statements had 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 nine months ended June 30, 2002 was $60 and $179, respectively. In the quarter ended June 30, 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 earnings per share would have otherwise been $0.01. For the nine months ended June 30, 2001, the Company amortized $198 related to goodwill. Excluding this amortization, the reported loss, net of taxes, would have been reduced by $139. The basic and diluted loss per share would have otherwise been $(0.64). 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 Income (Loss) SFAS No. 130, Reporting Comprehensive Income, requires disclosure of all components of comprehensive income ( loss). Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. The Company does not have any items of comprehensive income (loss) other than net income (loss). 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 -- Third quarter of fiscal year 2002 compared with third 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 June 30, 2002 June 30, 2001 -------------- ---------------- (unaudited) Net Sales 100.0 % 100.0 % Cost of Sales 62.6 % 61.4 % ------------ --------- Gross Profit 37.4 % 38.6 % Selling, General & Administrative Expenses 22.4 % 29.4 % Research and Development Expenses 4.9 % 5.8 % Amortization of Goodwill -- % 1.3 % Amortization of Acquired Intangibles 1.0 % 1.1 % ------------ --------- Income from Operations 9.1 % 1.0 % Interest Income -- % -- % Interest Expense (1.0)% (1.8)% ------------ --------- Income (Loss) Before Provision (Benefit) for Income Taxes 8.1 % (.8)% Provision (Benefit) for Income Taxes 2.4 % (.3)% ------------ --------- Net Income (Loss) 5.7 % (.5)% ============ =========
The following table presents, for the periods indicated, the sales of the product categories within the Undersea Systems segment:
Quarter Ended June 30, 2002 June 30, 2001 ---------------- ----------------- (unaudited) Underwater Acoustics $ 1,210 $ 1,594 Geophysical Exploration Equipment 891 1,713 Other Undersea Products 2,568 461 ---------- --------- Total Undersea Systems Sales $ 4,669 $ 3,768 ========== =========
12 The Package Inspection Systems segment has only one product line. Sales. Net sales increased by 17.9% in the third quarter of fiscal year 2002 to $6,132 as compared to $5,201 in the third quarter of fiscal year 2001. Sales of the Undersea Systems Division increased by 23.9% to $4,669 in the third quarter of fiscal year 2002 as compared to $3,768 in the third quarter of fiscal year 2001. This increase was primarily the result of a multi-million dollar order for remotely operated vehicles (ROV's) to a customer in Malaysia. This increase was offset by continued weakness in the markets served by the other lines within the Undersea Systems Division and is a result of fewer large project orders, decreased demand for Geophysical Exploration Equipment, consisting of geophysical hydrophones and side scan sonar equipment, some of which is used by the oil and gas industries, as compared with the third quarter of fiscal year 2001. Sales of the Package Inspection Systems Division increased by 2.1% to $1,463 in the third quarter of fiscal year 2002 as compared to $1,433 in the third quarter of fiscal year 2001. Gross Profit. Gross Profit increased by 14.5% to $2,296 for the third quarter of fiscal year 2002 as compared to $2,005 for the third quarter of fiscal year 2001. As a percentage of sales, gross profit was 37.4% in the third quarter of fiscal year 2002 as compared to 38.6% in the third quarter of fiscal year 2001. The decrease in gross profit percentage is attributed to increased sales of the products of the Undersea Systems Division which are less profitable than those of the Package Inspection Systems Division. The effect of this was partially offset by a $200 reduction of a warranty reserve related to an older model geophysical hydrophone, which had been recorded as an expense in the fourth quarter of the prior fiscal year. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by 10.0% to $1,374 for the third quarter of fiscal year 2002 as compared to $1,528 in the third quarter of fiscal year 2001. As a percentage of sales, selling, general and administrative expenses decreased to 22.4% in the third quarter of fiscal year 2002 as compared to 29.4% for the third quarter of fiscal year 2001. The decrease in selling, general, and administrative dollars is primarily a result of reduced sales commissions of $115 and reduced headcount. There was $59 in expenses during the third quarter of fiscal year 2001 related to the resignation of the former CEO and $85 of provisions for bad debts in the third quarter of fiscal year 2001 related to a former distributor. These expenses were not repeated in the third quarter of fiscal year 2002. The decrease in percentage of sales is a result of increased sales. Research and Development Expenses. Research and development expenses increased 1.3% to $304 for the third quarter of fiscal year 2002 as compared to $300 in the third quarter of fiscal year 2001. As a percentage of sales, research and development expenses decreased to 4.9% of sales in the third quarter of fiscal year 2002 from 5.8% in the third quarter of fiscal year 2001. The decrease in percentage of sales is a result of increased sales. 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 fiscal year-end companies with fiscal years beginning after March 15, 2001 and whose first interim period financial statements had 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 year 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 $60 in the third quarter of fiscal year 2002 and $61 in the third quarter of fiscal year 2001. The amortization of acquired intangibles relates to the Datasonics acquisition in fiscal year 1999. Interest Income. Interest income increased to $2 in the third quarter of fiscal year 2002 as compared to $0 in the third quarter of fiscal year 2001. The increase in interest income was a result of higher invested cash balances. Interest Expense. Interest expense decreased to $62 in the third quarter of fiscal year 2002 as compared to $90 in the third 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 balances on the line of credit. Provision (Benefit) for Income Taxes. The provision for income taxes was $149 in the third quarter of fiscal year 2002 as compared a benefit of $13 in the third quarter of fiscal year 2001. The effective tax rate in the third 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 - Nine months of fiscal year 2002 compared with nine 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:
Nine Months Ended June 30, 2002 June 30, 2001 ------------------- ------------------- Net Sales 100.0 % 100.0 % Cost of Sales 65.8 % 66.4 % ------------- ------------- Gross Profit 34.2 % 33.6 % Selling, General & Administrative Expenses 27.0 % 29.5 % Research and Development Expenses 6.9 % 9.8 % Amortization of Goodwill --- % 1.4 % Amortization of Acquired Intangibles 1.2 % 1.3 % ------------- ------------- Loss from Operations (.9)% (8.4)% Interest Income --- % .2 % Interest Expense (1.3)% (2.0)% ------------- ------------- Loss Before Benefit for Income Taxes (2.2)% (10.2)% Benefit for Income Taxes (.7)% (3.1)% ------------- ------------- Net Loss (1.5)% (7.1)% ============= =============
The following table presents, for the periods indicated, the sales of the product categories within the Undersea Systems segment: Nine Months Ended June 30, 2002 June 30, 2001 --------------- --------------- (unaudited) Underwater Acoustics $ 2,786 $ 4,786 Geophysical Exploration Equipment 3,304 4,185 Other Undersea Products 3,570 1,246 ------- ------- Total Undersea Systems Sales $ 9,660 $10,217 ======= ======= 15 The Package Inspection Systems segment has only one product line. Sales. Net sales increased by 1.5% in the first nine months of fiscal year 2002 to $14,445 as compared to $14,230 in the first nine months of fiscal year 2001. Sales of the Package Inspection Systems Division increased by 19.2% to $4,785 in the first nine months of fiscal year 2002 as compared to $4,013 in the first nine months of fiscal year 2001. The increase resulted largely from increased market penetration and new product introductions in the first nine months of fiscal year 2002. Sales of the Undersea Systems Division decreased by 5.5% to $9,660 in the first nine months of fiscal year 2002 as compared to $10,217 in the first nine 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. The decrease was partially offset by a multi-million dollar sale of remotely operated vehicles (ROV's) to a customer in Malaysia in April of 2002. The sales for side scan sonar equipment within the Geophysical Exploration Equipment product line were up 9.5% as a result of increased purchases of this equipment by the U.S. Navy and other customers as compared to the first nine months of fiscal year 2001. Gross Profit. Gross Profit increased by 3.2% to $4,946 for the first nine months of fiscal year 2002 as compared to $4,793 for the first nine months of fiscal year 2001. As a percentage of sales, gross profit was 34.2% in the first nine months of fiscal year 2002 as compared to 33.6% in the first nine 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 a $200 reduction of a warranty reserve related to an older model geophysical hydrophone, which had been recorded as an expense in the fourth quarter of the prior fiscal year. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by 7.4% to $3,897 for the first nine months of fiscal year 2002 as compared to $4,208 in the first nine months of fiscal year 2001. As a percentage of sales, selling, general and administrative expenses decreased to 27.0% in the first nine months of fiscal year 2002 as compared to 29.5% for the first nine 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 nine months of fiscal year 2001, $210 in expenses related to the resignation of the former CEO in the first nine months of fiscal year 2001, such as search fees for a successor and severance costs, and $85 in bad debt provisions related to a former distributor which were not repeated in the first nine months of fiscal year 2002. Research and Development Expenses. Research and development expenses decreased 28.7% to $997 for the first nine months of fiscal year 2002 as compared to $1,398 in the first nine months of fiscal year 2001. As a percentage of sales, research and development expenses decreased to 6.9% of sales in the first nine months of fiscal year 2002 from 9.8% in the first nine 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 nine months of fiscal year 2001, the elimination of certain outside costs that existed in the first nine 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 fiscal year-end companies with fiscal years beginning after March 15, 2001 and whose first interim period financial statements had 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 year 2002, the Company completed its initial evaluation of its goodwill by comparing the fair value of its reporting 16 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 $179 in the first nine months of fiscal year 2002 and $181 in the first nine months of fiscal year 2001. The amortization of acquired intangibles relates to the Datasonics acquisition in fiscal year 1999. Interest Income. Interest income decreased to $2 in the first nine months of fiscal year 2002 as compared to $27 in the first nine months of fiscal year 2001. The decrease in interest income was a result of lower invested cash balances. Interest Expense. Interest expense was $192 in the first nine months of fiscal year 2002 as compared to $287 in the first nine 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, reduced borrowings under the line of credit, and lower interest rates. Benefit for Income Taxes. The benefit for income taxes decreased to $96 in the first nine months of fiscal year 2002 as compared to $436 in the first nine months of fiscal year 2001. The effective tax rate in the first nine months 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 increased $95 from September 30, 2001 to June 30, 2002. Cash of $1,419 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 nine months of fiscal year 2002. The Company also used $235 and $1,089 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 repayment under the line of credit. The Company has a credit facility with a bank. This facility provides for loans under two notes: a $5,500 variable rate term note and a $600 line of credit. The term note is payable in 84 consecutive equal monthly installments of principal with interest at prime (4.75% at June 30, 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 June 30, 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 $600 as of June 30, 2002. There were no advances outstanding under the line of credit as of June 30, 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. The Company was not in conformance with some of the covenants in the first two quarters of this fiscal year and received waivers from the bank. As of June 30, 2002, the Company was in compliance with the three financial covenants under this credit facility. The Company believes that, based on its internal forecasts, it will remain in compliance with the financial covenants. Therefore, the Company has classified the debt outstanding under the term note that is due after June 30, 2003 as long term in the accompanying financial statements. 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 are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors which include: the timing of large project orders, competitive factors, shifts in customer demand, government spending, 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 4. Submission of Matters to a Vote of Security Holders (a) A Special Meeting in lieu of the Annual Meeting of Shareholders of the Registrant (the "Meeting") was held on May 3, 2002. (b) The Registrant solicited proxies for the Meeting pursuant to Regulation 14A; there was no solicitation in opposition to management's nominees for directors as listed in the Proxy Statement, and all such nominees were elected. (c) The following describes the matters voted upon at the Meeting and sets forth the number of votes cast for, against or withheld and the number of abstentions as to each such matter: (i) Election of Directors: Nominee For Withheld Samuel O. Raymond 1,196,672 12,787 Arthur L. Fatum 1,194,848 14,611 The directors whose term of office as a director continued after the Meeting are Stephen D. Fantone, Ronald L. Marsiglio, A. Theodore Mollegen, Jr., and Gary K. Willis. (ii) Authorization of appointment of Arthur Andersen LLP as independent auditors for 2002: For Against Abstain 1,129,973 52,496 24,990 19 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/ Ronald L. Marsiglio Ronald L. Marsiglio President, Chief Executive Officer, and Director By /s/ Francis E. Dunne, Jr. Francis E. Dunne, Jr. Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) DATE: August 12, 2002 STATEMENT PURSUANT TO 18 U.S.C. (S)1350 Pursuant to 18 U.S.C. (S)1350, each of the undersigned certifies that this Quarterly Report on Form 10-QSB for the period ended June 30, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Benthos, Inc. DATE: August 12, 2002 By /s/ Ronald L. Marsiglio Ronald L. Marsiglio President, Chief Executive Officer, and Director DATE: August 12, 2002 By /s/ Francis E. Dunne, Jr. Francis E. Dunne, Jr. Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) 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 (18) 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. 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. 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-KSB 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. (18) Previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 2002 (File No. 0-29024) and incorporated herein by this reference. -----END PRIVACY-ENHANCED MESSAGE-----