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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 of 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended September 30, 1997
[_] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transitional period from _______ to ________
Commission File No. 0-28932
BENTHOS, INC.
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(Name of Small Business Issuer in Its Charter)
Massachusetts 04-2381876
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
49 Edgerton Drive, Falmouth, Massachusetts 02556
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(Address of Principal Executive Offices) (Zip Code)
508-563-1000
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Each Class is to be to be so
Registered Registered
None
Securities registered under Section 12(g) of the Act:
Common Stock, $.0667 par value
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Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 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 [_]
Check if there is no disclosure of delinquent filers in response to item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ ]
The registrant had total operating revenues of $17,048,000 for its most recent
fiscal year ended September 30, 1997.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 5, 1997, based on the closing price for the stock on
such date as reported on the Nasdaq SmallCap Market of $16.00 per share was
$16,051,752. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
1,291,167 Shares of Common Stock, as of December 5, 1997
DOCUMENTS INCORPORATED BY REFERENCE
See Exhibit Index
Transitional Small Business Issuer Format (check one):
Yes [_] No [X]
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This report contains forward-looking statements which involve certain risks
and uncertainties. See Item 6, "Management's Discussion and Analysis -- Forward-
Looking Information" herein. Actual results and events may differ from those
discussed in the forward-looking statements.
Except as otherwise noted herein, all information in this report has been
adjusted to reflect the three for two stock split, effected in the form of a
stock dividend paid by the Company to stockholders of record as of November 18,
1997.
ITEM 1. DESCRIPTION OF BUSINESS
Benthos, Inc. (the "Company") was founded in 1962 to act as a supplier of
oceanographic products. It was incorporated as a Massachusetts corporation in
1965. Over the last 35 years, the Company has developed and acquired new
technology and products. Currently, the Company consists of two distinct
divisions: the Undersea Systems Division and the Container Inspection Systems
Division.
Historically, the Company has focused its efforts on the Undersea Systems
marketplace with particular emphasis placed on the military and government
markets. Early in the 1990's, funding for these markets declined and the
Company's sales to these markets suffered a corresponding reduction. As a
result, the Company shifted its priorities to business development efforts in
commercial markets. These markets include the geophysical industry, where the
Company's hydrophone products are used to discover oil and gas deposits
offshore, as well as the scientific research, nuclear inspection and
environmental markets. Also as a result of these efforts, added resources were
applied to the Company's Container Inspection Systems Division. A series of new
products were introduced and these products gained rapid acceptance into major
market segments such as the beer and beverage markets. The Company plans to
continue its emphasis on these markets into the future independent of any
recovery in the levels of government funding for the military market.
The Company's wholly-owned subsidiary, Benthos International, Inc. acts as
a foreign sales corporation (FSC) for the Company's foreign sales. It has no
substantial assets, liabilities or income.
Undersea Systems Division
The Company's Undersea Systems Division designs, develops, manufactures and
sells products and services used in oceanographic and undersea environments.
The markets for these products include the oceanographic research community
(research institutions, universities, government agencies and similar
organizations). Certain products are also sold to the oil industry (for offshore
oil and gas exploration) and the nuclear power industry. The product range
includes acoustic transponders used for location marking and navigation,
acoustic release devices used for recovering instrumentation packages from the
depths of the ocean, imaging systems (including video, 35mm and digital still
cameras),
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hydrophones used for geophysical exploration and sound detection, remotely
operated vehicles for inspection and light work tasks and glass flotation
products used to house instruments and to provide buoyancy. The Company's
undersea products are generally marketed under the trade name "Benthos."
Container Inspection Systems Division
The Company's Container Inspection Systems Division designs, develops,
manufactures and sells systems used to inspect the integrity of containers in
the food, pharmaceutical and beverage industries. The customers for these
systems include manufacturers of food, beverages and pharmaceuticals packaged in
bottles, cans, glass jars, plastic containers and assorted vacuum packages with
metal and plastic caps. These systems are marketed under the trade name
"TapTone." TapTone systems integrate various sensor technologies with digital
signal processing techniques in order to inspect containers for leakage, seal
integrity, low or high pressure, and similar packaging defects. TapTone
systems may be used on-line as continuous inspection systems that operate at
production speeds or as off-line inspection systems to periodically validate
package integrity.
1. Principal Products
Undersea Systems
The Company's undersea products are divided into five distinct product
groups as follows:
a. Acoustics
The Acoustics product group includes transponders, acoustic releases and
companion deck control systems. Transponders are used to transmit and receive
acoustic signals underwater for the purposes of determining location,
navigation, or sending and receiving data. These products are used for
scientific research, salvage and ship positioning operations. Both expendable
and recoverable products are manufactured. The transponder line includes low
cost versions that transmit a limited signal selection in response to a command
received, as well as more sophisticated versions that can be programmed to
transmit a wide variety of functions in response to received commands.
Transponders are monitored by and communicate with companion deck units which
are typically located on board a ship.
Acoustic releases are sound-operated devices that will anchor underwater
products in place and will release those products, allowing them to float to the
surface, in response to an acoustic command signal transmitted from the surface.
The acoustic release product line includes both deep water (up to 12,000
meters), heavy duty, releases as well as recently introduced shallow water (up
to 600 meters), light duty, low cost releases. Releases may be operated with
companion deck control units.
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b. Hydrophones
Hydrophones are underwater sensors designed to produce an output signal in
response to an acoustic pressure signal. They can be thought of as underwater
microphones. The Company's hydrophone products are typically used in the
offshore oil and gas exploration industry, where they listen to acoustic sound
waves generated by the reflections of an acoustic signal as it bounces off of
the various geological layers beneath the ocean floor. These data are used to
generate information about the geological structure beneath the ocean as a means
of locating promising oil and gas exploration sites. The Company's hydrophone
product line is also used in military applications to listen for and detect
submarines and other vessels under and on the surface of the ocean. Hydrophones
may also be sold to research institutions for various applications such as
listening to marine animals.
The Company's hydrophone product line includes sophisticated versions that
offer high sensitivity and can operate at great depth without significant
variation in response, as well as low cost hydrophones for the seismic research
industry that are produced in high production volumes. The Company's hydrophone
products may be used with companion amplifiers that convert the electrical
signals to usable formats and they may be integrated into arrays, which are
groupings of hydrophones assembled together in long tubes for the purpose of
added acoustic sensitivity and for listening to acoustic signals over a long
distance.
c. Imaging
The imaging products group consists of a line of cameras that are packaged
in enclosures that allow them to operate at varying depths underwater. The
Company's capabilities include still cameras (typically 35 mm), video cameras,
and recently introduced digital still cameras that can capture an image
comprised of digital data for transmission to the surface and subsequent
processing by software. The Company also sells companion underwater camera
flashes.
The Company's imaging products are used in research to photograph
underwater wildlife and geological formations. Imaging products are also used
in the commercial market to photograph underwater structures, such as oil rigs
and shipwrecks, for the purposes of inspection. Imaging products are also
employed in military applications to remotely inspect underwater objects such as
mines.
d. Remotely Operated Vehicles (ROVs)
ROVs are unmanned underwater vehicles that are controlled from the surface
by a skilled operator. The Company's ROV product line includes a number of
specialized designs that are aimed at specific markets. These markets include
the research sector, where ROVs may be used as a camera delivery system for
visual documentation and inspection. ROVs are also sold to the nuclear power
industry,
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where they are used to perform inspections and light work tasks in radioactive
cooling water pools, and to the military sector, where they may be used for
remote inspection and to retrieve or deliver objects. The Company's ROV products
are also used for sewer and pipeline inspection. ROV systems are occasionally
used by the entertainment industry.
e. Glass Flotation
The Company manufactures a line of glass spheres that are used to provide
buoyancy to underwater products and systems and may be used to house underwater
instruments and electronics, such as transponders. Glass spheres are offered
in three sizes depending on the individual requirements of buoyancy and/or
housing size. The Company also customizes its glass spheres for individual
customer requirements by providing various penetrations, machined surfaces and
electrical connectors. The Company pressure tests all of its glass sphere
products in order to insure successful operation at desired depths. Glass
spheres are normally provided with companion plastic "hard hats" that allow for
protection of the glass from breakage and for safe transport.
Container Inspection Systems
The Company's container inspection systems are used to inspect bottles,
cans and similar packages for a variety of defects. The TapTone product line
includes the following:
a. TapTone II Pressure/Vacuum Discriminator
TapTone II uses acoustic technology to test for acceptable levels of
pressure or vacuum in containers that have metal closures and/or are metallic
themselves (such as beverage cans, glass bottles with metal crowns, and
conventional steel cans). These data are used to determine if the tested
package meets preset quality acceptance criteria. TapTone II is used for a
variety of food processing and beverage applications and its principal market is
the brewing and beverage industry. The TapTone II system is an on-line, high
speed inspection system designed to test 100% of produced products and to reject
containers that are determined to be defective. A typical TapTone II system
consists of a sensor assembly, an electronic control and display unit, and a
rejector for removing defective containers from the production line. TapTone II
is also available in a case configuration which incorporates multiple sensors
for testing products that have been packaged in sealed cases.
b. Tracker
The Tracker system uses a proximity sensor to measure the deflection of the
metal lid on a container. These data are used to determine if the container
meets preset quality acceptance criteria based upon lid deflection and its
correlation with the pressure or vacuum inside the container. Tracker systems
are normally used on beverage cans and conventional steel cans. Tracker
systems are
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on-line, high speed inspection systems designed to test 100% of produced
product, rejecting containers that are determined to be defective. A typical
Tracker system consists of a sensor assembly, an electronic control and display
unit, and a rejector for removing defective containers from the production line.
Tracker systems are also available in a case configuration that incorporates
multiple proximity sensors for testing products that have been packaged in
sealed cases.
c. Turbo Tracker
The Turbo Tracker uses digital signal processing to enhance the accuracy
and performance of the Tracker system, allowing the system to test a wider
variety of containers. The Turbo Tracker system is also available in a case
configuration.
d. Laser Tracker
The Laser Tracker system is similar to the Tracker system except that it
uses a laser beam to measure closure deflection on a container with a non-
metallic lid or closure. These data are correlated with pressure inside the
container and are used to determine container quality based upon preset
criteria.
e. Squeezer System
The Squeezer system mechanically deforms a resilient container with a
preset force. These data are used to determine if the container is leaking
based upon preset criteria. Squeezer systems are typically used on squeezable
packages, such as plastic bottles, jugs, and pouches.
f. RayTrak
RayTrak is an X-ray based container inspection system used to determine if
containers are filled to the correct level. The inspection system illuminates
the container with an X-ray beam as it passes through the RayTrak. A detector
measures the X-ray radiation that passes through the container and correlates
that signal to the level of material in the container. The system can be
configured to detect underfills, overfills, or both. Containers such as steel
cans, aluminum beverage cans, bottles and jars are used with RayTrak.
2. Distribution and Marketing Methods
The Undersea Systems Division and the Container Inspection Systems Division
market their products through an international network of independent sales
representatives and distributors. Sales representatives and distributors are
located in North America, South America, Europe, the Far East, Africa and
Australia. Domestic and international customers may also order the Company's
products directly from its headquarters in Massachusetts. Both divisions of the
Company participate in a number of trade shows and exhibitions around the world.
The Company also maintains an
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internal staff of trained sales and marketing personnel with experience and
expertise in the markets served by the Company.
3. New Products
The Company continually invests in new product development. During the past
fiscal year, the Company introduced the Geopoint and RDA-X geophysical
hydrophones for sale. The Company also completed several upgrades and product
enhancements to its TapTone products. The Company also initiated other product
development projects that it plans to complete during fiscal year 1998.
4. Competition
Undersea Systems Division
The Company competes with a variety of larger and smaller companies in each
of its product sectors. The Company's policy is to compete based upon technical
superiority and quality. In some product categories, such as glass flotation,
the Company believes that it has a majority share of the market. In the
hydrophone and ROV product groups, the Company has a minority market share and
competes with larger companies, such as Teledyne, that have significantly more
resources than the Company. In the acoustics and imaging product groups, the
Company competes with a variety of domestic and foreign competitors that are
generally of the same approximate size as the Company.
Container Inspection Systems Division
The Container Inspection Systems Division competes with a number of
domestic and international competitors. At least two of these companies are
larger than the Company and offer a broader range of products. All of these
competitors offer some products that compete with certain models offered by the
Company. One German competitor recently introduced a product designed to
compete with the Company's leak detection products used for glass bottles with
metal caps.
The Company's policy is to compete by offering technically advanced,
innovative products. The Company also has a policy of pursuing patent
protection for its products when possible. The Company also competes by
providing customers with well trained field service and application engineering
support.
5. Sources and Availability of Raw Materials
The products of both divisions generally utilize mechanical and electrical
components that are readily available from a wide variety of domestic and
foreign vendors. In certain cases, the Company produces components internally,
utilizing its labor force and machine shop capability. Some components are
specially designed for specific products and are purchased from a single vendor.
A ceramic component that is used in the seismic hydrophone product is purchased
from a single vendor, Motorola Corp., although
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the Company believes that there are other vendors that possess the capability to
provide a replacement component. The Company's glass flotation products are also
purchased from a single vendor, Holophane Corp., although similar products could
be obtained from other vendors. The Company has not experienced any problems
with the supply of its raw materials and it believes that its sources of supply
are adequate for its present and future requirements.
6. Dependence on Major Customers.
Although the Company has a number of major customers, during fiscal 1997,
only one customer, Syntron, Inc., represented more than 10% of the Company's
total revenue.
7. Patents, Trademarks and Other Agreements
The Company possesses several patents pertaining to the design and
manufacture of its products. Several names utilized by the Company are also
trademarked. It is the Company's policy to seek patent protection on products
and designs that it considers important to its future. However, the Company
believes that quality and technical superiority, rather than patent protection,
are the most important criteria for its future success.
The Company does not license any of its patents or designs to others at
this time. The Company is currently a licensee under a non-exclusive license
pertaining to the design of its seismic hydrophone product from The Penn State
Research Foundation.
8. Government Approvals and Contracts
There are no government approvals required for any of the products
currently manufactured by the Company. Certain products of the Undersea Systems
Division cannot be sold to certain countries under U.S. export controls. The
Company does not anticipate that these export restrictions will be removed in
the near future.
During fiscal 1997, less than 5% of the sales of the Undersea Systems
Division were derived from military procurement contracts, particularly
contracts with the U.S. Navy. Accordingly, these revenues will continue to be
subject to the risks of changes in government appropriations and changes in
national defense policies and priorities. There can be no assurance that the
U.S. Navy will continue to purchase the Company's products.
9. Effect of Government Regulations
The Company is not aware of any government regulations or pending
legislation that would affect the future sale of its products.
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10. Research and Development
The Company maintains an internal staff of engineers and external
consultants with experience and expertise in the technologies it utilizes. The
majority of research and development programs are internally funded. Research
and development expenditures were $598,000, $665,000 and $1,307,000 for the
fiscal years ended September 30, 1995, 1996 and 1997, respectively. In
addition, the Company has an ongoing technical consulting agreement with William
D. McElroy, an expert in undersea acoustics.
11. Environmental Protection Regulations
The Company believes that its compliance with current federal, state, and
local environmental regulations will not have a material adverse effect on its
capital expenditures, earnings, or competitive position.
12. Employees
As of September 30, 1997, the Company employed 72 full-time individuals, 12
of whom were engaged in research and development, 33 in manufacturing and 27 in
sales, marketing and administrative positions. None of the Company's employees
is covered by a collective bargaining agreement. The Company believes that it
maintains good relations with its employees.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns its corporate offices in North Falmouth, Massachusetts,
which consist of 35,000 square feet of office and light industrial manufacturing
space in two single-story, industrial buildings on a 34 acre rural setting. The
Undersea Systems Division and the Container Inspection Systems Division are
housed in separate facilities, each with its own dedicated engineering,
manufacturing, testing and sales administration staff. All facilities have been
recently modernized and are in good condition.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, whether through the
solicitation of proxies or otherwise.
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded over-the-counter and is listed on the
Nasdaq SmallCap Market under the symbol BTHS. Prior to January 31, 1997, the
Company's Common Stock was traded on the OTC Bulletin Board.
The following table sets forth the high and low bid information for the
Company's Common Stock for the periods shown. Said quotations reflect inter-
dealer prices, without retail mark-up, mark-down, or commission, and may not
represent actual transactions. The stock prices set forth below are adjusted to
reflect the three for two stock split, effected in the form of a stock dividend
paid to stockholders of record as of November 18, 1997.
<TABLE>
<CAPTION>
Quarter Ended High Low
<S> <C> <C>
December 31, 1995 4.83 2.33
March 31, 1996 5.00 2.83
June 30, 1996 10.66 4.00
September 30, 1996 10.66 9.33
December 31, 1996 13.99 9.82
March 31, 1997 13.99 10.08
June 30, 1997 12.32 9.49
September 30, 1997 17.99 11.83
</TABLE>
As of December 5, 1997, there were approximately 300 holders of record of
the Company's Common Stock.
The Company has never declared dividends on its Common Stock and does not
anticipate paying dividends in the foreseeable future.
The Company did not issue any equity securities during the fiscal year
ended September 30, 1997 that were not registered under the Securities Act of
1933, other than the issuance of 5,390 shares of Common Stock to the Benthos,
Inc. Employee Stock Ownership Plan.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
The Company was founded in 1962 to act as a supplier of oceanographic
products. Over the last 35 years, the Company has developed and acquired new
technology and products. Currently, the Company consists of two distinct
divisions: the Undersea Systems Division and the Container Inspection Systems
Division. The Container Inspection Systems Division was formed in 1971 using
aspects of acoustic technology (originally developed for oceanographic products)
and applied to the testing of cans, bottles and other containers for the purpose
of finding leaks and other package defects.
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Results of Operations
The following table presents, for the periods indicated, certain
consolidated statements of income data.
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<CAPTION>
Year Ended
September 30,
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1997 1996 1995
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(In Thousands)
<S> <C> <C> <C>
Net sales $17,048 $11,723 $8,014
Cost of sales 7,640 5,392 4,033
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Gross profit 9,408 6,331 3,981
Selling, general and
administrative expenses 5,536 3,733 3,010
Research and development
expenses 1,307 665 598
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Income from operations 2,565 1,933 373
Interest expense, net 40 96 125
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Income before provision
for income taxes 2,525 1,837 248
Provision for income taxes 967 666 86
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Net income $ 1,558 $ 1,171 $ 162
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</TABLE>
The following table presents, for the periods indicated, the percentage
relationship of consolidated statements of income items to net sales.
<TABLE>
<CAPTION>
Year Ended
September 30,
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1997 1996 1995
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<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 44.8 46.0 50.3
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Gross profit 55.2 54.0 49.7
Selling, general and
administrative expenses 32.5 31.8 37.6
Research and development
expenses 7.7 5.7 7.5
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Income from operations 15.0 16.5 4.6
Interest expense, net 0.2 0.8 1.5
----- ----- -----
Income before provision for
income taxes 14.8 15.7 3.1
Provision for income taxes 5.7 5.7 1.1
----- ----- -----
Net income 9.1% 10.0% 2.0%
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</TABLE>
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Years Ended September 30, 1997 and 1996
Sales. Total sales increased 45.4% to $17,048,000 for fiscal year 1997 as
compared to $11,723,000 for fiscal year 1996. Sales by the Undersea Systems
Division increased by 80.5% to $9,871,000 for fiscal year 1997 as compared to
$5,468,000 for fiscal year 1996. The increase in Undersea Systems Division sales
was the result of the increased shipments of hydrophones used for offshore oil
exploration as well as an overall increase in the sales of the Company's
acoustic, imaging, and glass flotation product lines. Sales by the Container
Inspection Systems Division increased by 14.7% to $7,177,000 for fiscal year
1997 as compared to $6,255,000 for fiscal year 1996. This increase was
attributable to improved sales to the worldwide brewing industry as well as
continued penetration of the food and beverage segments.
Gross Profit. Gross profit increased by 48.6% to $9,408,000 for fiscal year 1997
as compared to $6,331,000 for fiscal year 1996. As a percentage of sales, gross
profit was 55.2% for fiscal year 1997 as compared to 54.0% for fiscal year 1996,
principally as a result of changes in product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 48.3% to $5,536,000 for fiscal year 1997 as
compared to $3,733,000 for fiscal year 1996. The increase in total expenses was
a result of higher selling and commission expenses coinciding with the increased
volume, additional staff necessary to support the Company's growth, expenses
relating to the registration and listing of the Company's securities on the
Nasdaq SmallCap Market, and various other legal and investor relations
activities in fiscal year 1997. As a percentage of sales, selling, general and
administrative expenses increased to 32.5% for fiscal year 1997 as compared to
31.8% for fiscal year 1996.
Research and Development Expenses. Research and development expenses increased
96.5% to $1,307,000 for fiscal year 1997 as compared to $665,000 for fiscal year
1996. As a percentage of sales, research and development expenses increased to
7.7% for fiscal year 1997 from 5.7% for fiscal year 1996. The increase in the
percentage of sales and dollars expended is due to investments in new product
development and is consistent with the Company's current operational plans.
Interest Expense. Interest expense, net, decreased to $40,000 for fiscal year
1997 as compared to $96,000 for fiscal year 1996. The decreased level of
interest expense, net, was a result of decreased borrowing under the credit line
and improved interest income due to higher invested cash balances.
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Years Ended September 30, 1996 and 1995
Sales. Total sales increased by 46.3% to $11,723,000 for fiscal year 1996 as
compared to $8,014,000 for fiscal year 1995. Sales by the Container Inspection
Systems Division increased by 71.7% to $6,255,000 for fiscal year 1996 as
compared to $3,643,000 for fiscal 1995. This increase was attributable to
increased sales in the domestic and international brewing industries, continued
penetration of the food and beverage market segments and an overall improvement
in the Company's international sales markets. Sales by the Undersea Systems
Division increased by 25.1% to $5,468,000 for fiscal year 1996 as compared to
$4,371,000 for fiscal year 1995. The increase in Undersea Systems Division sales
was the result of increased shipments of hydrophones used for off shore oil
exploration as well as an increase in sales of the newly released Digital Still
Camera (DSC) and the EROV remote operated vehicle used in nuclear reactor
inspections.
Gross Profit. Gross profit increased by 59.0% to $6,331,000 for fiscal year 1996
as compared to $3,981,000 for fiscal year 1995. As a percentage of sales, gross
profit increased to 54.0% of sales for fiscal year 1996 as compared to 49.7% for
fiscal year 1995. The increase in gross profit was attributable to increased
sales contribution of the products of the Container Inspection Systems Division,
which characteristically have a higher gross profit margin, as well as the
overall sales volume increase of 46.3% and the related overhead efficiencies
related to that increased volume.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 24.0% to $3,733,000 for fiscal year 1996 as
compared to $3,010,000 for fiscal year 1995. Overall, total expenses increased
primarily as a result of the increased selling expenses resulting from the
increased sales volume. As a percentage of sales, selling, general and
administrative expenses decreased to 31.6% of sales for fiscal year 1996 as
compared to 37.6% of sales for fiscal year 1995. This decrease was attributable
to the increased sales volume that did not require additional general and
administrative support.
Research and Development Expenses. Research and development expenses increased
11.2% to $665,000 for fiscal year 1996 as compared to $598,000 for fiscal year
1995. As a percentage of sales, research and development expenses decreased to
5.7% of sales for fiscal year 1996 as compared to 7.5% of sales for fiscal year
1995. The decrease was attributable to the increase in sales levels as well as
a reassessment of the Company's research and development expenses to enable the
Company to take advantage of its current technological lead in the container
inspection product line.
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Interest Expense. Interest expense, net, decreased by 23.2% to $96,000 for
fiscal year 1996 as compared to $125,000 for fiscal year 1995. The decrease was
attributable to a reduced level of borrowings during the period, improved cash
flow resulting from the increased sales volume, and an increase in interest
income.
Liquidity and Capital Resources
The Company's principal capital requirement is to provide working capital
to support growth. The Company has short-term financing available under a
$2,000,000 line of credit facility with a bank.
As of September 30, 1997, the Company had cash and cash equivalents of
approximately $2,663,000 as compared to a balance of $751,000 on September 30,
1996. Operating income for the fiscal year ended September 30, 1997 was
$2,565,400 as compared to $1,932,689 for the fiscal year ended September 30,
1996. Accounts receivable increased by $651,025 in order to support increased
order and sales volumes. Inventories decreased by $1,488,460 as inventory
control and reduction programs started in late fiscal year 1996 were fully
implemented. Prepaid expenses increased as a result of an increase in
refundable income taxes. Accounts payable decreased by $176,923 as lower
inventory balances required reduced levels of purchasing. Net cash provided by
operating activities increased to $1,998,515 for fiscal year 1997 as compared to
$1,544,740 for fiscal 1996.
In the fiscal year ended September 30, 1997, the Company used cash of
$610,246 for investing activities. Of this total, $504,072 was used to purchase
property, plant, and equipment.
Cash provided by financing activities for the fiscal year ended September
30, 1997 was $523,540. Included in this was the sale of treasury stock to the
ESOP of $51,356, and $500,910 realized from the exercise of stock options -
including the tax benefit.
The Company has an unsecured line of credit for $2,000,000. As of September
30, 1997, the Company had no outstanding advances against the line of credit.
The Company also has a mortgage on its office and manufacturing facilities as
detailed in Note 3 to Consolidated Financial Statements.
The Company believes that existing cash balances, current line of credit
arrangement and cash anticipated to be generated from operations will be
sufficient to finance the Company's operations for the next twelve months. A
portion of the Company's cash may be used to acquire or invest in complementary
businesses or products or to obtain the right to use complementary technologies.
From
15
<PAGE>
time to time, in the ordinary course of business, the Company evaluates
potential acquisitions of such businesses, products or technologies. The Company
engages in discussions and negotiations with respect to potential acquisitions
from time to time but has no current agreements or commitments at the present
time.
Prospects for the Future
The Company will continue to focus resources on growth opportunities in the
markets that it serves. These activities will include research and development,
distribution channels development, and geographical market development. In
addition, the Company will increase its efforts at identifying and pursuing
strategically compatible product and/or company acquisitions.
Undersea Systems Division
The Undersea Systems Division has made significant progress in penetrating
the market for geophysical oil and gas exploration. It is expected that this
division will continue to focus its resources on further business development in
this market. The Company believes that a number of its present products, as
well as those under development, are well-positioned to take advantage of
developing trends in the offshore oil and gas markets. These trends include an
increased effort to search for oil and gas deposits in deeper waters as well as
efforts to perform more accurate geophysical surveys in areas that were
previously surveyed using older, less accurate technology.
The Company will also continue to maintain its presence and focus on its
traditional markets, including military, oceanographic research and nuclear
inspection. Some of these markets are affected by the level of U.S. Government
expenditures which have declined sharply in recent years. However, the Company
believes that some future recovery is likely and that several promising
opportunities presently exist within these markets.
The Company is not aware of any trends or changes in market characteristics
for the markets served by its Undersea Systems Division that would adversely
affect either sales or gross profits.
Container Inspection Systems Division
The Container Inspection Systems Division serves the brewing, beverage,
food processing and pharmaceutical markets. An active competitive environment,
concerns about product liability, an increased focus on improving quality, and
efforts at cost reduction are characteristic trends within these industries.
These trends are favorable for the Company's products and the Company expects
these trends to continue in the future.
The Company will continue to focus its efforts on its
16
<PAGE>
development of the domestic and international beer market. In addition, the
Company plans to diversify its product range by developing and/or acquiring
compatible inspection products that expand the Company's inspection abilities.
The Container Inspection Systems Division competes with a number of
domestic and international companies. It is possible that increased competitive
pressures will be experienced in the future, affecting both sales and gross
profits. The Company is not aware of any technological trends that would
adversely affect the sales of its products within the industry segments served
by its Container Inspection Systems Division.
Profit Margins
Overall
Overall profit margins on the Company's products are influenced by the
relative mix of sales between the Undersea Systems Division and the Container
Inspection Systems Division. For fiscal year ended September 30, 1997, sales of
the Underseas Systems Division increased to 58% of total Company sales as
compared to 47% for the prior fiscal year, while sales of the Container
Inspection Division decreased to 42% of total Company sales as compared to 53%
for the prior fiscal year. The growth in sales from fiscal year 1996 to fiscal
year 1997 was 80.5% for the Underseas Systems Division and 14.7% for the
Container Inspection Systems Division. This resulted in an overall gross profit
for the Company of 55.2% for the fiscal year ended September 30, 1997 as
compared to 54.0% for the fiscal year ended September 30, 1996.
Undersea Systems Division
Profit margins on Undersea Systems Division products range from
approximately 30% for certain imaging systems products to more than 50% for
certain glass flotation products. Hydrophone products have gross profit margins
ranging between approximately 30% to 45%. The Company expects that the overall
sales mix of its undersea products will shift slightly in the future due to
increased sales of hydrophone products to the offshore oil and gas market. The
Company does not expect this sales mix to adversely affect overall profit
margins. It is possible that increased competition will result in lower
realized selling prices for certain products, especially hydrophones, resulting
in reductions in product profit margins. The Company is not aware of other
trends or competitive pressures that would adversely affect either product mix
or gross profit margin within its glass flotation, imaging, ROV and acoustic
product lines.
Container Inspection Systems Division
Profit margins on Container Inspection Systems Division products range
between approximately 45% and 65%. The Company expects that the sales mix of
different products will not significantly change and will not adversely affect
overall
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<PAGE>
divisional gross margins in the future. It is possible that increased
competition will result in an overall reduction of selling prices and associated
profit margins. The Company is not aware of any technological trends or
marketplace trends which would adversely affect gross margins on these product
lines.
Forward-Looking Information
This report contains certain forward-looking statements and information
relating to the Company which are based upon the beliefs of the Company's
management as well as assumptions made by and information currently available to
the Company's management. When used in this report, words such as "anticipate,"
"believe," "estimate," "expect," "intend," and similar expressions, as they
relate to the Company's management, identify forward-looking statements. Such
statements reflect the current views of management with respect to future events
and are subject to certain risks, uncertainties and assumptions relating to the
operations and results of operations of the Company, 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.
ITEM 7. FINANCIAL STATEMENTS
The information required by this item is incorporated by reference to the
Financial Statements set forth on pages F-1 through F-16 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The current directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Samuel O. Raymond 68 Chairman Emeritus of the Board
of Directors and Director of
Research
John L. Coughlin 45 President and Chief Executive
Officer and Director
Stephen D. Fantone 44 Chairman of the Board of
Directors
A. Theodore Mollegen, Jr. 60 Director
Thurman F. Naylor 77 Director
Francis E. Dunne, Jr. 51 Treasurer and Chief
Financial Officer
</TABLE>
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<PAGE>
The Company's board of directors is classified into three classes, with the
members of the respective classes serving for staggered three-year terms. The
first class, consisting of Mr. Coughlin, is eligible for re-election at the 2000
annual meeting; the second class, consisting of Mr. Mollegen and Dr. Fantone, is
eligible for re-election at the 1998 annual meeting; the third class, consisting
of Messrs. Raymond and Naylor, is eligible for re-election at the 1999 annual
meeting. Officers of the Company serve at the pleasure of the Board of
Directors.
The following information is provided with respect to the business
experience of each director and executive officer of the Company:
Mr. Raymond founded the Company in 1962 and served as its President for
twenty years. He previously served as Chairman of the Board from 1965-1982 and
from 1989 to January 1997. Mr. Raymond most recently served as the President
and Chief Executive Officer of the Company from June 1995 to April 1996. Mr.
Raymond has served as a director of the Company since 1965. In January 1997,
Mr. Raymond was elected as Chairman Emeritus of the Board of Directors and
Director of Research of the Company. Mr. Raymond has a B.S. in Mechanical
Engineering from M.I.T. and was instrumental in the development and marketing of
many of the Company's original products in both the Company's Undersea Systems
Division and the Container Inspection Systems Division.
Mr. Coughlin has served as President, Chief Executive Officer and a
director of the Company since April 1996 and as Treasurer from October 1996 to
February 1997. Prior to joining the Company, he was President (1993-1996) and
Vice President of Sales and Marketing (1990-1993) of Dynisco Instruments, an
operating division of Dynisco, Inc., a wholly-owned subsidiary of Berwind
Industries. Dynisco Instruments is a manufacturer of pressure and temperature
measurement products for the plastics industry. He holds a B.S. in Physics from
Georgetown University and an M.S. in Physics from Northeastern University.
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<PAGE>
Dr. Fantone became a director of the Company in March 1995 and was elected
Chairman of the Board of Directors in January 1997. Since 1982, he has been
President of Optikos Corporation, an optical engineering firm which he founded
and which specializes in the design of optical products and instrumentation and
optical test equipment. He has B.S. degrees in Electrical Engineering and
Management from M.I.T. and a Ph.D. in optics from the Institute of Optics at the
University of Rochester. Dr. Fantone has been awarded 36 patents and is the
author of numerous technical papers and articles on optical technology. He is
also currently a Senior Lecturer in the Mechanical Engineering Department at
M.I.T and Treasurer of the Optical Society of America.
Mr. Mollegen has served as a director of the Company since 1985. He is the
President and Chief Executive Officer of Allied Resources Corporation, a company
which provides technical training, engineering, health management, and safety
management services to industrial firms. Prior to joining Allied Resources in
1993, Mr. Mollegen was Chairman and Chief Executive Officer of Analysis &
Technology, Inc., a provider of engineering and technical services to the U.S.
Navy. Mr. Mollegen has a B.E. in Electrical Engineering from Yale University
and is the author of over 90 technical papers and reports on undersea topics.
He is a member of the board of Technology for Connecticut (TECHCONN), Inc. and
of Southeast Area Regional Economic Development (SEA-RED). He is also a member
of the Advisory Committee of the University of New Haven Southeast Branch.
Mr. Naylor is President of Cameras and Images International, Inc. (a dealer
in photographic images and equipment), is the owner and founder of the Naylor
Museum of Photography in Brookline, Massachusetts, and has served as a director
of the Company since 1987. Mr. Naylor is an internationally recognized
authority on photographic history, processes, and technology. Mr. Naylor is the
former Chairman, President and CEO of Standard-Thomson Corporation, a
manufacturer of temperature and pressure controls and electronic equipment. Mr.
Naylor is also the former Chairman, President and CEO of Thomson International
Corporation (1959-1989), a manufacturer of temperature controls with engineering
and manufacturing facilities in twelve countries. Mr. Naylor has a B.A. in
Economics from Fordham University and a B.S. in Mechanical Engineering from The
Johns Hopkins University. Mr. Naylor is also a member of the Board of Directors
of Analysis & Technology, Inc., Sandler Productions, Inc. (motion picture and
television production) and Summit Industries, Inc. (a manufacturer of x-ray
equipment).
Mr. Dunne was appointed Treasurer and Chief Financial Officer of the
Company on February 1, 1997. Prior to joining the Company, he was Chief
Financial Officer of Kinney Vacuum Company, an operating division of General
Signal
20
<PAGE>
Corporation (1993-1996). Kinney Vacuum Company is a manufacturer of industrial
vacuum pumps and pump systems for the food packaging, chemical and
pharmaceutical, heat treating, automotive, and other industries. Prior to
joining Kinney, Mr. Dunne was Director of Planning and Analysis at General
Signal Corporation (1990-1993). General Signal Corporation is a manufacturer of
products serving the process controls, electrical controls, and industrial
technology industries. Mr. Dunne has a B.S. degree in Public Accounting from St.
John's University, an M.B.A. in Finance from Long Island University, and is a
Certified Public Accountant.
There are no family relationships among the directors or executive officers
of the Company.
None of the following events has occurred within the past five years with
respect to any director or executive officer of the Company or, to the knowledge
of the Company, any person owning 5% or more of the outstanding shares of Common
Stock of the Company:
(1) Any bankruptcy petition filed by or against any business of which
such person as a general partner or executive officer either at the
time of the bankruptcy or within two years prior to that time;
(2) Any conviction in a criminal proceeding or being subject to a pending
criminal proceeding (excluding traffic violations and other minor
offenses);
(3) Being subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of
business, securities or banking activities; and
(4) Being found by a court of competent jurisdiction (in a civil action),
the Commission or the Commodity Futures Trading Commission to have
violated a Federal or State securities or commodities law, and the
judgment has not been reversed, suspended, or vacated.
Based solely upon a review of Forms 3, 4 and 5 and amendments thereto
furnished to the registrant under Rule 16a-3(d) during the fiscal year ended
September 30, 1997, no director, officer, or beneficial owner of more than 10%
of the Company's equity securities failed to file on a timely basis, any reports
required by Section 16(a) of the Securities Exchange Act of 1934, except that
Samuel O. Raymond was late on one occasion in filing a Form 4 reporting the sale
of 7,100 shares of Common Stock.
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<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation paid by the Company for the
Company's last three fiscal years to the Company's chief executive officer
during the Company's fiscal year ended September 30, 1997 and the only other
executive officer who received an annual salary and bonus exceeding $100,000
during that fiscal year.
<TABLE>
<CAPTION>
Annual Compensation
Name and Fiscal -------------------- All Other
Principal Position Year Salary Bonus Compensation(1)
- ------------------------- ------ ---------- -------- ---------------
<S> <C> <C> <C> <C>
John L. Coughlin, 1997 $153,769 $53,000 $ 10,879
President and Chief 1996 66,462 20,000 --
Executive Officer (2)
Francis E. Dunne, Jr. 1997 $ 82,788 $30,000 --
Treasurer and Chief
Financial Officer (3)
All directors and 1997 $321,370 $83,000 $ 47,714
officers as a group 1996 236,170 80,620 8,659
(6 in all) 1995 273,024 -- 172,772
</TABLE>
(1) Includes amounts contributed to individual accounts with the
Company's ESOP and 401(k) Retirement Plan. Also includes $171,523 in
severance pay to a former officer incurred with respect to fiscal
1995.
(2) Mr. Coughlin has served as President and Chief Executive Officer
since April 8, 1996.
(3) Mr. Dunne has served as Treasurer and Chief Financial Officer since
February 1, 1997.
On January 24, 1997, the Company granted to Francis E. Dunne, Jr. an option
to purchase 15,000 shares of the Company's Common Stock, expiring January 23,
2007, at an exercise price of $11.50 per share, vesting in four annual
installments commencing on the first anniversary of the date of grant. This
option represented 51.3% of the number of shares subject to stock options
granted to all employees during the 1997 fiscal year.
Stock Option Table
The following table sets forth information concerning each exercise of stock
options during the Company's fiscal year ended September 30, 1997 by the
executive officers named in the Summary Compensation Table and the number and
value of shares underlying
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<PAGE>
those stock options at that date.
<TABLE>
<CAPTION>
Number
of
Unexercised
Securities Value of
Underlying Unexercised
Name and Shares Options In-the-Money
Principal Acquired on Value At Fiscal Options at
Position Exercise Realized(1) Year End Fiscal Year End(1)
- ----------------------- ----------- ------------ ----------- --------------------
<S> <C> <C> <C> <C>
John L. Coughlin,
President and Chief 10,500 $83,584 8,250(2) $113,438(2)
Executive Officer -- -- 56,250(3) 773,438(3)
Francis E. Dunne, Jr.
Treasurer and Chief 15,000(3) 98,750(3)
Financial Officer
</TABLE>
(1) Based upon the difference between the option exercise price and the
closing price of the Company's Common Stock on the Nasdaq SmallCap
Market on the date of exercise or September 30, 1997, as
appropriate.
(2) Shares underlying options exercisable as of September 30, 1997.
(3) Shares underlying options not exercisable as of September 30, 1997.
Director's Compensation
The Company's policy is to pay each of its non-employee directors a fee of
$750 for each directors' meeting attended and to reimburse travel expenses when
incurred. The Company intends to continue this policy in the future and expects
that the Board of Directors will be reviewing the level of compensation at its
January meeting. In addition, Stephen D. Fantone receives compensation of
$2,500 per month for his services as Chairman of the Board of Directors.
Employment Contracts
In 1990, the Company entered into an employment agreement with Samuel O.
Raymond. Under this agreement, as amended, Mr. Raymond will be employed as the
Director of Research of the Company at a salary of $72,000 per year and will
serve as the Chairman Emeritus of the Board of Directors for as long as he is
elected to that position. This agreement commenced on August 1, 1990 and will
expire on July 31, 2005. After the expiration of the initial term, the
agreement will automatically be renewed annually as of August 1, 2005 and each
August 1 thereafter. The agreement also provides that if a change in control of
the Company should occur during the first, second or last five years of the
initial term of the agreement, Mr. Raymond is entitled to
23
<PAGE>
receive $427,974, $335,504, or $199,636, respectively, from the Company. The
Company has also agreed to pay the premiums on a $1,500,000 life insurance
policy on Mr. Raymond's life under a split dollar plan.
The Company has entered into an employment agreement with John L. Coughlin,
effective April 8, 1996, pursuant to which Mr. Coughlin agrees to serve as the
President and Chief Executive Officer of the Company. The agreement provides
for an initial base salary of $144,000 and an initial minimum bonus of $20,000
payable October 1, 1996. In accordance with the agreement, the Board of
Directors has adjusted Mr. Coughlin's base salary to $168,000 per year,
effective October 1, 1997 and has adopted an annual incentive compensation
program for Mr. Coughlin based upon the attainment of quantitative and
qualitative objectives to be set by the Compensation Committee at the beginning
of each fiscal year. In addition, pursuant to the agreement, Mr. Coughlin was
granted an incentive stock option to purchase 75,000 shares of the Company's
Common Stock at an exercise price of $4.33 per share, vesting in four equal
annual installments commencing on the first anniversary of the date of grant.
Employee Stock Ownership Plan
Employees of the Company who are over the age of 19 and have completed one
year of service are eligible to participate in the Benthos, Inc. Employee Stock
Ownership Plan (the "ESOP"), originally adopted by the Company in 1979. The
ESOP is administered by a committee approved by the Board of Directors (the
"ESOP Committee"). The Company may make annual contributions to the Trustee of
the Plan, State Street Bank and Trust Company, Boston, Massachusetts, in an
amount determined by the Board of Directors. Such contributions are invested by
the Trustee, under the direction of the ESOP Committee, in the Company's stock.
Contributions are allocated among participants' individual accounts in
proportion to their individual annual compensation. Benefits become vested
according to years of service, increasing incrementally from 20% after one year
of service to 100% after five years of service. Upon an employee's retirement,
benefits are distributable in shares of the Company's stock.
401(k) Retirement Plan
All employees who are over the age of 19 are eligible to participate in the
Section 401(k) Retirement Plan adopted by the Company effective July 1, 1987
(the "401(k) Plan"). The 401(k) Plan is administered by the Company. Pursuant
to the 401(k) Plan, three types of contributions may be made to a Trust Fund for
which Union Bank and Trust Company serves as Trustee. First, an employee may
defer a certain amount of salary each calendar year. In addition, the Company
makes matching contributions and may make additional contributions which are
allocated among the
24
<PAGE>
individual accounts of participants who have completed at least one year of
service in proportion to their annual compensation. All contributions are
subject to certain percentage limitations set forth in the Internal Revenue
Code, and the plan contains certain vesting requirements. Withdrawal of
contributions by a participant prior to retirement age (as that term is defined
in the plan) is only permitted in limited circumstances as defined in the plan
and generally tax penalties are imposed upon participants who withdraw their
contributions prior to age 59-1/2.
Supplemental Executive Retirement Plan
The Supplemental Executive Retirement Plan became effective August 1, 1990
for the benefit of certain members of management as determined from time to time
by the Board of Directors. The plan enables participants to exclude from gross
income elective amounts paid on their behalf by the Company to a Retirement
Trust Fund to be subsequently paid to the participants after retirement. It is
administered by an Administrative Committee consisting of Samuel O. Raymond and
Stephen D. Fantone.
The Company has established the Benthos, Inc. Supplemental Executive
Retirement Trust Fund and will transfer to the trust fund, on an annual or more
frequent basis, an amount equal to the elective deferrals made by the
participants. No such elective deferrals had been made by participants as of
September 30, 1997. Samuel O. Raymond and Stephen D. Fantone are Trustees of the
Trust Fund.
1990 Stock Option Plan
a. Description of the Plan
The 1990 Stock Option Plan (the "1990 Plan") was approved by the
stockholders of the Company on January 26, 1990. Three hundred thousand
(300,000) shares of the authorized but unissued or treasury shares of the Common
Stock of the Company have been reserved for the grant of options under the 1990
Plan. The 1990 Plan will terminate ten years from December 20, 1989.
The 1990 Plan is administered by the Board of Directors which may in its
sole discretion grant options to purchase shares and issue shares upon the
exercise of such options as provided in the plan. The Board may delegate its
powers, duties and responsibilities to a Committee, the members of which shall
be "disinterested persons" as described in the plan. The Board has delegated
its responsibilities to a committee of disinterested directors (the
"Compensation and Incentive Stock Option Committee").
25
<PAGE>
The 1990 Plan provides for the grant of incentive stock options to officers
and key employees of the Company or of any subsidiary Company, and of non-
qualified options to officers, key employees and advisors of the Company or of
any of its subsidiaries. The Board of Directors determines the eligibility of
an individual, the designation of the type of option and the number of shares to
be optioned to an eligible individual, taking into account the position and
responsibilities of the individual being considered, the nature and value to the
Company or its subsidiaries of such individuals' service, his or her present and
potential contribution to the success of the Company and such other factors as
the Board may deem relevant.
More than one option may be granted to an eligible individual, although no
option which is designated as an incentive stock option shall be granted to an
individual who owns stock representing more than ten percent (10%) of the stock
of the Company unless the purchase price shall be at least one hundred ten
percent (110%) of the fair market value of the stock at the time the option is
granted.
No cash consideration is received by the Company for granting an option but
each option is evidenced by an option agreement. The option price of shares
designated as non-qualified options is determined by the Board of Directors.
The price for incentive stock options must be the fair market value of the
Common Stock at the time the option is granted as determined by the Board in
accordance with regulations under Section 422 of the Internal Revenue Code.
Payment for shares may be made in cash for the full amount or in shares already
held by the optionee, or by a combination of cash and shares, although the Board
of Directors must give consent to payment made in shares.
Options will be granted for a term not exceeding ten years as determined by
the Board of Directors at the time of the grant, subject to earlier termination
as specified in the Plan. Except as otherwise determined from time to time by
the Board of Directors, options may not be exercised during the first twelve
(12) months after the option is granted. Thereafter, options become exercisable
as to twenty-five percent (25%) of the shares covered thereby and as to an
additional twenty-five percent (25%) upon the expiration of each of the next
three (3) succeeding twelve (12) month periods. An optionee may exercise an
option which has become exercisable in full or in part. Options are not
transferable by the optionee and are held for purposes of investment in the
Company. The Company is prohibited under the Plan from making loans to
optionees to permit them to exercise options granted under the Plan.
b. Federal Income Tax Consequences
(i) Incentive Stock Options
26
<PAGE>
An optionee will not recognize taxable income upon the grant or exercise of
an incentive stock option. Moreover, if stock acquired upon such exercise is
held for a least two years from the date on which the option is granted and at
least one year after the date of exercise, the optionee will not realize taxable
income as a result of exercising the option, and any gain or loss realized by
the optionee on the ultimate sale of such stock is treated as long-term capital
gain or loss.
In the event that the optionee disposes of the stock prior to the
expiration of the required holding periods (a "disqualifying disposition"), the
optionee will realize ordinary income to the extent of the lesser of (i) the
excess of the fair market value of the stock at the time of exercise over the
exercise price, or (ii) the excess of the amount received for the stock upon
disposition over the exercise price. The basis in the stock acquired upon
exercise of the option will equal the amount of taxable income recognized by the
optionee plus the option exercise price. Upon eventual disposition of the
stock, the optionee will recognize long-term or short-term capital gain or loss,
depending on the holding period of the stock and the difference between the
amount realized by the optionee upon disposition of the stock and his basis in
the stock.
Notwithstanding the tax treatment accorded incentive stock options, the
excess of the fair market value of stock on the date of the exercise of the
option over the exercise price of the option is an item of tax preference for
alternative minimum tax purposes giving rise to potential tax liability at the
alternative minimum tax rate. If the alternative minimum tax does apply to the
optionee, an alternative minimum tax credit may reduce the regular tax upon
eventual disposition of the stock.
The Company will not be allowed an income tax deduction upon the grant or
exercise of an incentive stock option by the optionee. In addition, provided
that the holding requirements noted above are met, the Company will not be
allowed an income tax deduction upon the ultimate disposition by the optionee of
stock acquired through the exercise of an option. In the event, however, of a
disqualifying disposition, the Company will be allowed an income tax deduction
in an amount equal to the ordinary income recognized by the optionee.
(ii) Non-Qualified Stock Options
As in the case of incentive stock options, no income is recognized by the
optionee on the grant of a non-qualified stock option. On the exercise by an
optionee of a non-qualified option, the excess of the fair market value of the
stock when the option is exercised over its cost to the optionee will be (a)
taxable to the optionee and (b) generally deductible for Federal income tax
purposes by the Company.
27
<PAGE>
The optionee's tax basis in his stock will equal his cost for the stock
plus the amount or ordinary income he had to recognize with respect to the non-
qualified stock option. Accordingly, upon a subsequent disposition of stock
acquired upon the exercise of a non-qualified option, the optionee will
recognize short-term or long-term capital gain or loss, depending upon the
holding period of the stock, equal to the difference between the amount realized
upon disposition of the stock by the optionee and his basis in the stock. Stock
acquired on the exercise of a non-qualified stock option is not subject to the
above-mentioned two (2) year and one (1) year holding periods that are imposed
on incentive stock options and the exercise of a non-qualified stock option does
not give rise to an item of tax preference for alternative minimum tax purposes.
As of September 30, 1997, options for the purchase of an aggregate of
117,563 shares of Common Stock at exercise prices ranging from $2.04 to $12.79
per share were outstanding under the 1990 Plan.
Stock Option Plan for Non-Employee Directors
This plan (the "Director Plan") was approved by the stockholders on March
4, 1994. Under the Director Plan, each director who is not an employee of the
Company will be entitled to receive (when he initially assumes office, and when
any other option held by such director expires), an option for the purchase of
22,500 shares of the Company's Common Stock at an exercise price equal to market
value as of the date of the grant of the option, provided that the maximum
number of shares which, in the aggregate, may be acquired under the Plan and
under any option outstanding on March 1, 1994 and held by a non-employee
director is 22,500 shares. The option will not be exercisable during the first
twelve months after the date of the grant. After twelve months, the option will
be exercisable as to one-third of the shares covered thereby. After twenty-four
months from the date of grant, the option will be exercisable as to two-thirds
of the shares covered thereby and after thirty-six months from the date of
grant, the option will be exercisable as to all of the shares covered thereby.
The options expire five years from the date of grant and are not transferable.
In the event the director ceases to serve as a director of the Company, the
option may be exercised only to the extent that the option is exercisable and is
in effect on the day such service ceases.
In the event of a sale or transfer of all or substantially all of the
assets of the Company, a merger into another corporation or a change in control
arising by reason of the acquisition by a person or group, owning prior to such
time less than 51% of the outstanding stock of the Company of additional shares
so that the person or group owns 51% or more of the outstanding stock, the
options will become exercisable in full, notwithstanding the exercise schedule.
Under certain
28
<PAGE>
circumstances, the Board of Directors may cancel the options for consideration
in cash or in kind so as to expedite a sale of assets or change in control.
The Director Plan provides that the number of shares issuable thereunder
shall be adjusted to prevent dilution in the event of any reorganization,
merger, consolidation, recapitalization, reclassification, stock split-up,
combination of shares or stock dividend.
The Director Plan may be terminated at any time by the Board of Directors
and will terminate in any event ten years from the date of its adoption by the
stockholders.
Each of the Company's present non-employee directors was granted an option
for the purchase of 22,500 shares of the Company's Common Stock as described in
Item 11 below. Although certain of these options were granted prior to the
adoption of the Director Plan, the terms of such options are substantially the
same as those applicable to the Director Plan as described above, except that
the options can continue to be held by a director who ceases to be a director
but continues to serve as a consultant rendering advice and service similar to
the advice and service rendered by a director.
The Federal income tax consequences upon grant and exercise of stock
options under the Director Plan are as described in "1990 Stock Option Plan -
Federal Income Tax Consequences - Non-Qualified Stock Options" above.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information is furnished as of December 5, 1997 with respect
to the beneficial ownership of shares of Common Stock of the Company by the
directors and executive officers of the Company, all of the directors and
officers of the Company as a group and all persons known to be the beneficial
owners of more than five percent of such outstanding stock. Unless otherwise
indicated, each of the persons named below held sole voting and investment power
over the shares listed below as of said date.
In accordance with the rules of the Securities and Exchange Commission,
shares which an individual has the right to acquire pursuant to stock options
which are exercisable within sixty days are considered to be beneficially owned
and for purposes of calculating the percentage ownership of stock for an
individual who holds exercisable stock options, such shares are also considered
to be outstanding. Reference should be made to the footnotes below for further
information as to each individual listed. All share amounts reflect the three
for two stock split, effected in the form of a stock dividend paid by the
Company to stockholders of record as of November 18, 1997.
29
<PAGE>
<TABLE>
<CAPTION>
Shares Percent of Outstanding
Name and Address (1) Beneficially Owned Common Stock
<S> <C> <C>
Samuel O. Raymond 195,315 (2) 15.1%
Ronald K. Church 1996 Trust 128,250 9.9%
State Street Bank and Trust
Company, Trustee of the
Benthos, Inc. Employee
Stock Ownership Plan
("ESOP")(3) 60,523 4.7%
John L. Coughlin 8,332 (4) 0.6%
Stephen D. Fantone 38,250 (5) 2.9%
A. Theodore Mollegen, Jr. 10,500 0.8%
Thurman F. Naylor 22,500 (6) 1.7%
Francis E. Dunne, Jr. 3,750 (7) 0.3%
All directors and officers
as a group (6 persons) 278,647 (8) 20.6%
</TABLE>
(1) Except as set forth below, the address of each of the individuals set
forth in the table is c/o Benthos, Inc., 49 Edgerton Drive, North
Falmouth, Massachusetts 02556. The address of the Ronald K. Church
Trust is 46 Riddle Hill Road, Falmouth, Massachusetts 02540. The
address of State Street Bank and Trust Company is 225 Franklin
Street, Boston, Massachusetts 02110.
(2) Includes 2,889 shares owned by the Company's ESOP, over which Mr.
Raymond has sole voting power. Also includes 55,243 shares owned by
Mr. Raymond's children, as to which shares Mr. Raymond disclaims
beneficial ownership.
(3) Pursuant to the terms of the plan, plan participants are entitled to
direct the Trustee as to the manner in which all shares allocated to
such participants' accounts are to be voted.
(4) Consists of 8,250 shares which Mr. Coughlin has the right to acquire
through the exercise of a stock option for 75,000 shares granted
April 8, 1996 and 82 shares owned by the Company's ESOP over which
Mr. Coughlin has
30
<PAGE>
sole voting power.
(5) Includes 26,250 shares which Dr. Fantone has the right to acquire
through the exercise of a stock option for 22,500 shares granted
January 19, 1995 and a stock option for 11,250 shares granted January
24, 1997.
(6) Consists of 22,500 shares which Mr. Naylor has the right to acquire
through the exercise of a stock option granted January 29, 1993.
(7) Consists of 3,750 shares which Mr. Dunne has the right to acquire
through the exercise of a stock option for 15,000 shares granted
January 24, 1997.
(8) Includes an aggregate of 60,750 shares which the directors and
officers have the right to acquire through the exercise of certain
options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 29, 1997, the Company entered into a License Agreement with a
corporation wholly-owned by Dr. Stephen D. Fantone, Chairman of the Board of
Directors of the Company, with respect to the concept of utilizing optical
technology, for which Dr. Fantone's corporation possesses technical expertise,
for application to certain products currently under development by the Company.
Under the agreement, the Company will pay the development costs to Dr. Fantone's
corporation. During the fiscal year ended September 30, 1997, the Company paid
Dr. Fantone's corporation $314,000 for services and materials provided under
this contract. The proprietary rights to the technology will be owned by Dr.
Fantone's corporation, which has granted an exclusive license to the Company for
the use of the technology upon the terms and conditions set forth in the
agreement.
The Company's policy with respect to business relationships with officers,
directors, or affiliates is that any such relationships must be fully disclosed
to the Board of Directors and must be upon terms not less favorable to the
Company than those available from third parties dealing at arm's length.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The financial statements set forth in the Index to Consolidated
Financial Statements contained on page F-1 hereof are filed herewith
as a part of this report.
31
<PAGE>
(b) The exhibits set forth in the Exhibit Index on the page immediately
preceding the exhibits are filed herewith as a part of this report.
(c) No reports on Form 8-K were filed by the registrant during the last
quarter of the fiscal year covered by this report.
32
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BENTHOS, INC.
By /s/ JOHN L. COUGHLIN
--------------------------
John L. Coughlin,
President
Date: December 19, 1997
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<S> <C> <C>
/s/ JOHN L. COUGHLIN President, Chief Executive December 19, 1997
- ----------------------------- Officer and Director
John L. Coughlin
/s/ FRANCIS E. DUNNE, JR. Treasurer and Chief December 19, 1997
- ----------------------------- Financial Officer
Francis E. Dunne, Jr. (principal financial
and accounting officer)
/s/ STEPHEN D. FANTONE Chairman of the Board of December 23, 1997
- ----------------------------- Directors
Stephen D. Fantone
/s/ SAMUEL O. RAYMOND Director December 20, 1997
- -----------------------------
Samuel O. Raymond
/s/ A. THEODORE MOLLEGEN, JR. Director December 23, 1997
- -----------------------------
A. Theodore Mollegen, Jr.
/s/ THURMAN F. NAYLOR Director December 23, 1997
- -----------------------------
Thurman F. Naylor
</TABLE>
33
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-1
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1997 AND 1996 F-2
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED
SEPTEMBER 30, 1997, 1996 AND 1995 F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT FOR THE
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED SEPTEMBER 30, 1997, 1996 AND 1995 F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Benthos, Inc.:
We have audited the accompanying consolidated balance sheets of Benthos, Inc. (a
Massachusetts corporation) and subsidiary as of September 30, 1997 and 1996, and
the related consolidated statements of income, stockholders' investment and cash
flows for each of the three years in the period ended September 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Benthos, Inc. and subsidiary as
of September 30, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 1997,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
October 24, 1997 (except with respect
to the matter discussed in Note 12, as to
which the date is November 18, 1997)
F-1
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30,
1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,663,166 $ 751,357
Accounts receivable, less reserves
of approximately $162,000 and $127,000 at
September 30, 1997 and 1996, respectively 2,170,167 1,519,142
Inventories 2,062,798 3,551,258
Prepaid expenses 469,113 70,039
Deferred tax asset 516,000 516,000
----------- ----------
Total current assets 7,881,244 6,407,796
----------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land 127,339 127,339
Buildings and improvements 1,845,303 1,845,303
Equipment and fixtures 2,619,666 2,220,045
Demonstration equipment 1,447,890 1,348,204
Construction in progress 22,808 18,042
----------- ----------
6,063,006 5,558,933
Less--Accumulated depreciation 4,101,608 3,567,862
----------- ----------
1,961,398 1,991,071
----------- ----------
OTHER ASSETS 233,730 215,077
----------- ----------
$10,076,372 $8,613,944
=========== ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt $ 34,076 $ 29,646
Accounts payable 313,986 490,909
Accrued expenses 1,373,005 1,680,893
Customer deposits 141,204 275,911
----------- ----------
Total current liabilities 1,862,271 2,477,359
----------- ----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 791,086 824,242
----------- ----------
COMMITMENTS (Note 9)
STOCKHOLDERS' INVESTMENT:
Common stock, $.0667 par value
Authorized--2,500,000 shares
Issued--1,586,115 and 1,510,178 shares at
September 30, 1997 and 1996, respectively 105,794 100,729
Capital in excess of par value 1,269,821 773,976
Retained earnings 6,894,139 5,335,733
Treasury stock, at cost (846,739) (898,095)
----------- ----------
Total stockholders' investment 7,423,015 5,312,343
----------- ----------
$10,076,372 $8,613,944
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1997 1996 1995
<S> <C> <C> <C>
NET SALES $17,047,635 $11,722,807 $8,014,416
COST OF SALES 7,639,442 5,392,021 4,033,704
----------- ----------- ----------
Gross profit 9,408,193 6,330,786 3,980,712
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,535,763 3,732,848 3,009,931
RESEARCH AND DEVELOPMENT EXPENSES 1,307,030 665,249 597,798
----------- ----------- ----------
Income from operations 2,565,400 1,932,689 372,983
INTEREST INCOME 41,810 10,065 616
INTEREST EXPENSE (81,804) (105,420) (125,792)
----------- ----------- ----------
Income before provision for income taxes 2,525,406 1,837,334 247,807
PROVISION FOR INCOME TAXES 967,000 666,000 86,000
----------- ----------- ----------
Net income $ 1,558,406 $ 1,171,334 $ 161,807
=========== =========== ==========
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $1.14 $.90 $.12
=========== =========== ==========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 1,370,375 1,306,922 1,335,167
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN TREASURY STOCK, AT COST TOTAL
NUMBER $.0667 EXCESS OF RETAINED NUMBER STOCKHOLDERS'
OF SHARES PAR VALUE PAR VALUE EARNINGS OF SHARES AMOUNT INVESTMENT
<S> <C> <C> <C> <C> <C> <C> C>
BALANCE, SEPTEMBER 30, 1994 1,472,678 $ 98,228 $ 603,528 $4,002,592 173,460 $(592,336) $4,112,012
Purchase of treasury stock - - - - 109,179 (220,411) (220,411)
Net income - - - 161,807 - - 161,807
--------- -------- ---------- ---------- ------- --------- ----------
BALANCE, SEPTEMBER 30, 1995 1,472,678 98,228 603,528 4,164,399 282,639 (812,747) 4,053,408
Sale of treasury stock - - - - (2,244) 6,884 6,884
Purchase of treasury stock - - - - 19,943 (92,232) (92,232)
Exercise of stock options,
including tax benefit 37,500 2,501 170,448 - - - 172,949
Net income - - - 1,171,334 - - 1,171,334
--------- -------- ---------- ---------- ------- --------- ----------
BALANCE, SEPTEMBER 30, 1996 1,510,178 100,729 773,976 5,335,733 300,338 (898,095) 5,312,343
Sale of treasury stock - - - - (5,390) 51,356 51,356
Exercise of stock options,
including tax benefit 75,937 5,065 495,845 - - - 500,910
Net income - - - 1,558,406 - - 1,558,406
--------- -------- ---------- ---------- ------- --------- ----------
BALANCE, SEPTEMBER 30, 1997 1,586,115 $105,794 $1,269,821 $6,894,139 294,948 $(846,739) $7,423,015
========= ======== ========== ========== ======= ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,558,406 $1,171,334 $ 161,807
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 621,267 455,667 504,218
Deferred income taxes (59,000) (198,000) (48,000)
Changes in assets and liabilities:
Accounts receivable (651,025) (522,843) (294,560)
Inventories 1,488,460 (658,675) (67,843)
Prepaid expenses (399,074) (5,030) 193
Accounts payable and accrued expenses (425,812) 1,355,849 (208,592)
Customer deposits (134,707) (53,562) 279,189
---------- ---------- ---------
Net cash provided by operating activities 1,998,515 1,544,740 326,412
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (504,072) (528,175) (473,688)
Increase in other assets (106,174) (38,872) (41,928)
---------- ---------- ---------
Net cash used in investing activities (610,246) (567,047) (515,616)
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock - (92,232) (220,411)
Sale of treasury stock 51,356 6,884 -
Exercise of stock options, including tax benefit 500,910 172,949 -
Increase (decrease) in demand note payable - (275,000) 275,000
Payments on long-term debt, net (28,726) (56,398) (37,547)
---------- ---------- ---------
Net cash provided by (used in) financing activities 523,540 (243,797) 17,042
---------- ---------- ---------
NET INCREASE (DECREASE ) IN CASH AND CASH EQUIVALENTS 1,911,809 733,896 (172,162)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 751,357 17,461 189,623
---------- ---------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $2,663,166 $ 751,357 $ 17,461
========== ========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the year $ 81,804 $ 105,420 $ 125,791
========== ========== =========
Income taxes paid during the year $1,624,164 $ 235,337 $ 158,885
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Benthos, Inc. (the Company) designs, manufactures, sells and services
oceanographic and robotic equipment for underwater exploration, research
and defense, as well as electronic inspection equipment for the automated
assessment of the seal integrity of consumer food, beverage, pharmaceutical
and chemical containers. The Company's customers are located throughout the
world.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies as described below and elsewhere
in the accompanying notes to the consolidated financial statements.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Benthos International Inc., a
foreign sales corporation. All material intercompany transactions and
balances have been eliminated in consolidation.
(b) Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(c) Cash and Cash Equivalents
The Company considers all highly liquid securities with original
maturities of three months or less to be cash equivalents.
(d) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Work-in-process and finished goods inventories include
materials, labor and overhead. Inventories consist of the following at
September 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Raw materials $ 89,997 $ 203,314
Work-in-process 1,927,860 3,226,405
Finished goods 44,941 121,539
---------- ----------
$2,062,798 $3,551,258
========== ==========
</TABLE>
F-6
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(e) Depreciation and Amortization
The Company provides for depreciation and amortization using the
straight-line method by charges to operations in amounts estimated to
allocate the cost of the assets over their estimated useful lives, as
follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSETS CLASSIFICATION USEFUL LIFE
<S> <C>
Buildings and improvements 15-33 years
Equipment and fixtures 5 years
Demonstration equipment 3 years
</TABLE>
(f) Intangible Assets
The Company assesses the realizability of intangible assets in
accordance with Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets To Be Disposed Of.
(g) Revenue Recognition and Warranty Costs
The Company recognizes revenue upon shipment. Amounts received from
customers for future delivery are shown as customer deposits in the
accompanying consolidated balance sheets. Warranty costs incurred by the
Company have been insignificant.
(h) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentration of
Credit Risk, requires disclosure of any significant off-balance-sheet
and credit risk concentrations. Financial instruments, which potentially
subject the Company to concentrations of credit risk, are principally
cash, cash equivalents and accounts receivable. The Company places its
cash and cash equivalents in highly rated institutions. In 1997, one
customer accounted for 15.5% of net sales. In 1996 and 1995, no single
customer accounted for more than 10% of net sales. As of September 30,
1997, one customer accounted for approximately 12% of accounts
receivable. In 1996, two customers accounted for 30% and 14%,
respectively, of accounts receivable and in 1995, one customer accounted
for 19% of accounts receivable. The Company has no significant off-
balance-sheet concentration of credit risk such as foreign exchange
contracts, options contracts or other foreign hedging arrangements.
F-7
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(i) Reclassifications
The Company has reclassified certain prior year information to conform
with the current year's presentation.
(j) Financial Instruments
The estimated fair value of the Company's financial instruments, which
include cash and cash equivalents, accounts receivable and debt,
approximate their carrying value.
(2) ACCRUED EXPENSES
Accrued expenses consist of the following at September 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Accrued commissions $ 215,152 $ 92,439
Accrued vacation 100,050 92,550
Accrued income taxes - 592,535
Accrued 401(k)/ESOP 273,701 204,105
Accrued bonus 281,661 168,900
Other accrued expenses 502,441 530,364
---------- ----------
$1,373,005 $1,680,893
========== ==========
</TABLE>
(3) LONG-TERM DEBT
Long-term debt consists of the following at September 30, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Mortgage note payable to a bank in monthly
payments of principal and interest of $9,085
through June 2004, with the balance due in
July 2004, interest at 9.25%. The note is
secured by land and buildings. The Company
is required to maintain certain covenants,
including debt service coverage, as defined $825,162 $853,888
Less--Current maturities of long-term debt 34,076 29,646
-------- --------
$791,086 $824,242
======== ========
</TABLE>
F-8
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FIANCIAL STATEMENTS
(Continued)
The following table summarizes principal payments required on long-term
debt as of September 30, 1997:
<TABLE>
<CAPTION>
FISCAL YEAR Amount
<S> <C>
1998 $ 34,076
1999 37,365
2000 40,972
2001 44,926
2002 49,262
Thereafter 618,561
--------
$825,162
========
</TABLE>
(4) DEMAND NOTE PAYABLE
As of September 30, 1997, the Company has a $2,000,000 unsecured line of
credit with a bank. There were no amounts outstanding under this line of
credit at September 30, 1997. Borrowings under this agreement are payable
on demand and bear interest at the Wall Street Journal's prime rate (8.5%
at September 30, 1997). The Company is required to maintain certain
covenants, including debt service coverage.
(5) INCOME TAXES
The Company accounts for income taxes under the liability method in
accordance with SFAS No. 109, Accounting for Income Taxes. Under the
liability method specified by SFAS No. 109, a deferred tax asset or
liability is determined based on the difference between the financial
statement and tax bases of assets and liabilities, as measured by the
enacted tax rates assumed to be in effect when these differences reverse.
The components of the provision for income taxes for each of the three
years in the period ended September 30, 1997 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal-
Current $785,000 $ 697,000 $101,000
Deferred (45,000) (150,000) (38,000)
-------- --------- --------
740,000 547,000 63,000
-------- --------- --------
State-
Current 241,000 167,000 33,000
Deferred (14,000) (48,000) (10,000)
-------- --------- --------
227,000 119,000 23,000
-------- --------- --------
$967,000 $ 666,000 $ 86,000
======== ========= ========
</TABLE>
F-9
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company's effective tax rate differed from the statutory rate for the
reasons set forth below:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit 6.2 5.2 1.8
Tax benefit of foreign sales corporation (2.4) (3.5) (2.8)
Other .5 .5 1.7
----- ---- ----
Effective tax rate 38.3% 36.2% 34.7%
===== ==== ====
</TABLE>
The components of the net deferred tax asset recognized in the
accompanying consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax assets are primarily the result of
temporary differences, including nondeductible reserves
and accruals $562,000 $ 621,000
Valuation allowance (46,000) (105,000)
-------- ---------
Net deferred tax asset $516,000 $ 516,000
======== =========
</TABLE>
Under SFAS No. 109, the Company recognizes a deferred tax asset for the
future benefit of its temporary differences if it concludes that it is
more likely than not that the deferred tax asset will be realized. The
reduction in the valuation allowance from September 30, 1996 to September
30, 1997 is due to management's belief that it is more likely than not
that a higher percentage of the deferred tax assets will be realized.
(6) EMPLOYEE BENEFIT PLANS
(a) Stock Option Plans
The Company has granted to certain directors nonqualified stock
options to purchase shares of the Company's common stock at a price
not less than the fair market value of the shares at the date of
grant. The options are exercisable ratably over a three-year period,
commencing one year from the date of grant, and expire not more than
five years from the date of grant. At September 30, 1997, 97,500
shares of common stock were reserved for issuance upon exercise of
the nonqualified stock options. At September 30, 1997, 41,250 shares
were available for grant.
F-10
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company's 1990 Stock Option Plan (the 1990 Plan) authorizes
300,000 shares of the Company's common stock for issuance. The 1990
Plan is administered by the Board of Directors and provides for the
granting of incentive stock options and nonqualified stock options.
The options are exercisable ratably over a four-year period,
commencing one year from the date of grant, and expire not more than
10 years from the date of grant. The purchase price applicable to
incentive stock options granted may not be less than the fair market
value as of the date of grant. At September 30, 1997, 182,438 shares
were available for grant.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
1990 PLAN DIRECTOR OPTIONS
NUMBER OF WEIGHTED NUMBER OF WEIGHTED
SHARES AVERAGE SHARES AVERAGE
OPTION PRICE OPTION PRICE
<S> <C> <C> <C> <C>
Outstanding, September 30, 1994 198,750 $ 1.92 82,500 $ 1.97
Granted - - 22,500 1.75
Terminated (93,750) 1.85 (22,500) 2.25
Exercised - - - -
------- ------ ------- ------
Outstanding, September 30, 1995 105,000 1.98 82,500 1.83
Granted 89,250 4.33 - -
Terminated (22,500) 2.04 - -
Exercised - - (37,500) 1.83
------- ------ ------- ------
Outstanding, September 30, 1996 171,750 3.19 45,000 1.83
Granted 29,250 11.39 11,250 11.50
Terminated (7,500) 2.04 - -
Exercised (75,937) 2.33 - -
------- ------ ------- ------
Outstanding, September 30, 1997 117,563 $ 5.86 56,250 $ 3.77
======= ====== ======= ======
Exercisable, September 30, 1997 10,125 $ 4.33 37,500 $ 1.85
======= ====== ======= ======
</TABLE>
The range of actual exercise prices for options exercisable as of
September 30, 1997 for nonqualified stock options was $1.75 to $1.92. All
options exercisable for incentive stock options had an exercise price of
$4.33.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 requires the measurement of the fair value of
stock options or warrants to be included in the statement of operations
or disclosed in the notes to financial statements. The Company has
determined that it will continue to account for stock-based compensation
for
F-11
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
employees under Accounting Principles Board Opinion No. 25 and elect the
disclosure-only alternative under SFAS No. 123 for stock-based
compensation awarded in 1997 and 1996 using the Black-Scholes option
pricing model prescribed by SFAS No. 123. The underlying assumptions
used are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1997 1996
<S> <C> <C>
Risk-free interest rate 6.20% 6.73%
Expected dividend yield - -
Expected life (years) 7 7
Expected volatility 40% 40%
Weighted average remaining contractual life of
options outstanding (years) 6.2 8.1
</TABLE>
The weighted average grant date fair value of options granted during the
years ended September 30, 1997 and 1996 under these plans is $5.90 and
$2.33, respectively.
Had compensation cost for the Company's stock option plans been
determined consistent with SFAS No. 123, pro forma net income and net
income per share would have been the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997 1996
<S> <C> <C>
Net income
As reported $1,558,406 $1,171,334
Pro forma 1,463,202 1,119,271
Net income per common and common equivalent share
As reported $ 1.14 $ .90
Pro forma $ 1.07 $ .86
</TABLE>
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to September 30, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in
future years.
(b) Employee Stock Ownership Plan
The Company has an Employee Stock Ownership Plan (ESOP) for
substantially all employees. Contributions to the ESOP are made at the
discretion of the Board of Directors, provided that the total amount
contributed for any ESOP year does not exceed the maximum amount
allowable by the Internal Revenue Code. Amounts allocated to a
participant's account vest ratably over five
F-12
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
years based on years of completed service, as defined. The accompanying
consolidated statements of income for the years ended September 30,
1997, 1996, 1995 include provisions for contributions to the ESOP of
approximately $71,000, $51,000 and $7,000, respectively.
(c) 401(k) Retirement Plan
The Company maintains a 401(k) Retirement Plan covering all eligible
employees, as defined. Contributions to the plan are made at the
discretion of the Board of Directors in an amount determined by the
Board. These contributions vest to a participant's account ratably over
five years based on years of credited employment, as defined.
Additionally, each participant may elect to contribute up to 20% of
their compensation for the plan year, but not more than $9,500 (for
calendar 1997), to the plan. The accompanying consolidated statements of
income for the years ended September 30, 1997, 1996, 1995 include
provisions for contributions to the plan of approximately $210,000,
$153,000 and $21,000, respectively.
(d) Supplemental Executive Retirement Plan
The Company has a Supplemental Executive Retirement Plan (SERP) for the
benefit of certain management and highly compensated executive
employees. Under the SERP, participants may elect to defer a portion of
their compensation paid by the Company for supplemental retirement
benefits. The Company also established the Supplemental Executive
Retirement Trust (the Trust Fund) and shall regularly transfer to the
Trust Fund amounts equal to the elective deferrals made by participants
under the SERP. No such elective deferrals have been made by
participants as of September 30, 1997.
(7) NET INCOME PER SHARE
Net income per common and common equivalent share is based on the weighted
average number of common and common equivalent shares outstanding during
each period. Common equivalent shares include outstanding stock options to
the extent dilutive computed in accordance with the treasury stock method.
Fully diluted net income per common and common equivalent share has not
been presented, as it is not significantly different.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share. SFAS No. 128 must be adopted by the Company for
the year ending September 30, 1998 and when adopted all prior earnings per
share amounts must be retroactively restated.
F-13
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In accordance with Staff Accounting Bulletin No. 74, the Company is disclosing
the effect this statement would have on the years ended September 30, 1997 and
1996 on a pro forma basis. The following table summarizes the pro forma earnings
per share amounts under SFAS No. 128:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30, 1997
NET INCOME SHARES PER SHARE
AMOUNT
<S> <C> <C> <C>
Net income $1,558,406
----------
Basic earnings per share:
Income available to common stockholders 1,558,406 1,225,722 $ 1.27
==========
Diluted earnings per share:
Options issued - 144,653
---------- ---------
Income available to common $1,558,406 1,370,375 $ 1.14
stockholders plus assumed conversions ========== ========= ==========
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30, 1996
NET INCOME SHARES PER SHARE
AMOUNT
<S> <C> <C> <C>
Net income $1,171,334
----------
Basic earnings per share:
Income available to common stockholders 1,171,334 1,190,529 $ .98
==========
Diluted earnings per share:
Options issued - 116,393
---------- ---------
Income available to common $1,171,334 1,306,922 $ .90
stockholders plus assumed conversions ========== ========= ==========
</TABLE>
Basic earnings per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
year. The computation of diluted earnings per common share is similar to the
computation of basic earnings per common share except that the denominator is
increased for the assumed exercise of dilutive options using the treasury
stock method.
F-14
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(8) EXPORT SALES INFORMATION
Export sales primarily to Europe and Asia were approximately $7,610,000,
$6,662,000 and $3,699,000 in 1997, 1996 and 1995, respectively.
(9) EMPLOYMENT AND NONCOMPETITION AGREEMENT
The Company has an employment and noncompetition agreement, as amended,
with an director/stockholder. In connection with the employment agreement,
the Company has agreed to provide a $1,500,000 split-dollar life insurance
policy on the director/stockholder. At the director/stockholder's request,
the Company may be obligated to repurchase from the director/stockholder
the number of shares that are contributed to or purchased by the Company's
ESOP each year. The Company also has the right of first refusal on any
future sales of common stock by the director/stockholder at fair market
value. In addition, a change in the control of the Company, as defined,
will result in certain payments to the director/stockholder, as outlined
under the employment agreement.
Compensation expense of approximately $77,000, $115,000 and $85,000
related to this agreement is included in the accompanying 1997, 1996 and
1995 consolidated statements of income, respectively.
(10) INDUSTRY SEGMENT INFORMATION
The Company operates in two industry segments--undersea systems and
container inspection systems. Information with respect to industry
segments are set forth as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1997 1996 1995
<S> <C> <C> <C>
Sales to unaffiliated customers
Undersea systems $ 9,871,000 $ 5,468,000 $4,371,000
Container inspection systems 7,177,000 6,255,000 3,643,000
----------- ----------- ----------
Total $17,048,000 $11,723,000 $8,014,000
=========== =========== ==========
Income from operations
Undersea systems 1,355,000 $ 88,000 $ (285,000)
Container inspection systems 1,210,000 1,845,000 658,000
----------- ----------- ----------
Total $ 2,565,000 $ 1,933,000 $ 373,000
=========== =========== ==========
Identifiable assets
Undersea systems $ 3,555,000 $ 4,216,000 $3,820,000
Container inspection systems 2,639,000 2,723,000 1,973,000
Corporate assets 3,882,000 1,675,000 591,000
----------- ----------- ----------
Total $10,076,000 $ 8,614,000 $6,384,000
=========== =========== ==========
</TABLE>
F-15
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(11) RELATED PARTY
The Company has had research and development services performed by an
entity controlled by the Company's Chairman of the Board. The Company
expensed $314,000 for these services in fiscal 1997.
(12) SUBSEQUENT EVENT
On October 22, 1997, the Company's Board of Directors approved a three for
two stock split, effected in the form of a dividend to shareholders of
record as of November 18, 1997. The accompanying consolidated financial
statements and related notes for all periods presented have been
retroactively adjusted to reflect the stock split.
F-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Benthos, Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of Benthos, Inc. and subsidiary included in
this Form 10-KSB and have issued our report thereon dated October 24, 1997. Our
audit was made for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. The schedule listed in Item 14(a) is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected
to the auditing procedures applied in the audit of the basic consolidated
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein, in relation to
the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
October 24, 1997
<PAGE>
SCHEDULE II
BENTHOS, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
ACCOUNTS RECEIVABLE, RESERVE
<TABLE>
<CAPTION>
BALANCE, CHARGED TO COSTS BALANCE,
BEGINNING AND EXPENSES END OF
OF PERIOD DEDUCTIONS PERIOD
<S> <C> <C> <C> <C>
For the Year Ended September 30,
1995 $ 50,000 $ 21,000 $ - $ 71,000
1996 71,000 56,000 - 127,000
1997 127,000 56,500 21,500 162,000
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit
3.1 Restated Articles of Organization (1)
3.2 Articles of Amendment dated April 28, 1997 (2)
3.3 By-Laws (1)
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 License Agreement between the Company and The Penn State
Research Foundation dated December 13, 1993 (1)
10.14 Technical Consultancy Agreement between the Company and
William D. McElroy dated July 12, 1994 (1)
10.15 Technical Consultancy Agreement between the Company and
William D. McElroy dated October 1, 1996 (3)
10.16 General Release and Settlement Agreement between the Company
and Lawrence W. Gray dated February 8, 1996 (1)
10.17 Line of Credit Loan Agreement between the Company and Cape
Cod Bank and Trust Company dated September 24, 1990, as
amended (1)
<PAGE>
Exhibit
10.18 Commercial Mortgage Loan Extension and Modification
Agreement between the Company and Cape Cod Bank and Trust
Company, dated July 6, 1994 (1)
10.19 License Agreement between the Company and Optikos
Corporation dated July 29, 1997 (3)
11 Computation of Earnings Per Share
21 Subsidiaries of the Registrant (1)
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
(1) Previously filed as an exhibit to Registrant's Registration
Statement on Form 10-SB filed with the Commission on December 17, 1996
(File No. O-28932) 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-
28932) 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-
28932) and incorporated hereby by this reference.
<PAGE>
EXHIBIT 11
----------
BENTHOS, INC. AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Years Ended September 30,
1997 1996 1995
<S> <C> <C> <C>
Net income $1,558,406 $1,171,334 $ 161,807
---------- ---------- ----------
Weighted average common shares
outstanding 1,225,722 1,190,529 1,226,396
Common stock equivalents
outstanding, pursuant to the
treasury stock method 144,653 116,393 108,771
---------- ---------- ----------
Weighted average number of
common and common equivalent
shares outstanding 1,370,375 1,306,922 1,335,167
========== ========== ==========
Net income per common and
common equivalent share
outstanding $ 1.14 $ .90 $ .12
========== ========== ==========
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-19425.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
December 22, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF BENTHOS, INC. CONTAINED ELSEWHERE IN THIS
REGISTRATION STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 2,663,166
<SECURITIES> 0
<RECEIVABLES> 2,170,167
<ALLOWANCES> 161,593
<INVENTORY> 2,062,798
<CURRENT-ASSETS> 7,881,244
<PP&E> 6,063,006
<DEPRECIATION> 4,101,608
<TOTAL-ASSETS> 10,076,372
<CURRENT-LIABILITIES> 1,862,271
<BONDS> 791,086
0
0
<COMMON> 105,794
<OTHER-SE> 7,317,221
<TOTAL-LIABILITY-AND-EQUITY> 10,076,372
<SALES> 17,047,635
<TOTAL-REVENUES> 17,047,635
<CGS> 7,639,442
<TOTAL-COSTS> 5,535,763
<OTHER-EXPENSES> 1,307,030
<LOSS-PROVISION> 56,500
<INTEREST-EXPENSE> 81,804
<INCOME-PRETAX> 2,525,406
<INCOME-TAX> 967,000
<INCOME-CONTINUING> 1,558,406
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,558,406
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.14
</TABLE>
