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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, 1999
[_] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transitional period from _______ to ________
Commission File No. 0-029024
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, No. 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 Registered
None
Securities registered under Section 12(g) of the Act:
Common Stock, $.06 2/3 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
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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 [X]
The registrant had total operating revenues of $17,248,000 for its most recent
fiscal year ended September 30, 1999.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 27, 1999, based on the closing price for the stock on
such date as reported on the Nasdaq SmallCap Market of $7.50 per share was
$7,145,370. 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:
1,366,548 Shares of Common Stock, as of December 27, 1999
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.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Benthos, Inc. (the "Company") was founded in 1962 to act as a manufacturer
of oceanographic products. It was incorporated as a Massachusetts corporation in
1965. Over the last 37 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 in the search for 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 was 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.
In August, 1999, the Company acquired substantially all of the assets of
Datasonics, Inc., a manufacturer of acoustic based oceanographic products. The
Datasonics product lines are complementary to the Company's traditional undersea
products and are sold to many of the same customers and through substantially
the same product distribution system. The Company is in the process of
integrating the business acquired from Datasonics into its current operations.
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.
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Undersea Systems Division
The Company's Undersea Systems Division designs, develops, manufacturers
and sells products and services used in oceanographic and underwater
environments. The markets for these products include oceanographic research, oil
and gas exploration and production, hydrographic survey, nuclear power
generation, and underwater relocation, marking and navigation. 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, optical imaging systems (including video, 35mm and digital
still cameras), 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
product lines acquired from Datasonics include side scan sonars and sub bottom
profilers used for sea bed imaging, acoustic modems used to transmit digital
data underwater, and acoustic pingers used to locate and mark objects lost
underwater such as aircraft flight data and voice recorders. The Company's
undersea products are generally marketed under the trade name "Benthos." The
Company may also continue to use the "Datasonics" name for certain products.
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 or vacuum, 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 and services are divided into nine distinct
groups as follows:
a. Acoustics
The Acoustics product group includes transponders, acoustic releases and
companion deck control systems, and altimeters. 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
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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 shallow water (up to 600 meters), light
duty, low cost releases. Releases may be operated with companion deck control
units.
Altimeters are used to determine the distance from the seabed to an object
or vehicle in the water column.
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 digital still cameras
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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 and lights.
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, 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.
f. Acoustic Modems
Acoustic modems are used to send and receive digital data underwater using
sound as the transmitting signal. The Company manufactures several different
configurations of modems dependent on the specific requirements of the
applications. Underwater acoustic modems utilize a sending and/or receiving
transducer, suitable digital electronics for coding and decoding the acoustic
signals and proprietary software algorithms to enable the modems to work in the
underwater environment.
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g. Relocation Pingers
Relocation pingers are small acoustic transmitters that operate in water
and produce a steady acoustic signal. Using a suitable receiver, an underwater
object equipped with a relocation pinger may be located by listening for the
pinger's pressure-emitted signal. Relocation pingers are most commonly installed
on commercial and military flight data and voice recorders but may also be used
on other objects such as torpedoes, remotely operated vehicles and shipping
containers.
h. Side Scan Sonar Systems and Sub Bottom Profilers
Side scan sonar systems consist of an underwater towed body, commonly
referred to as a "towfish" and an electronic control and display package. The
towfish emits an acoustic signal while it is being towed and then listens for
the signal's reflections which are generated by objects on the sea floor. These
echoes are then manipulated electronically and by software and used to generate
an image of the sea floor. Side scan sonars are commonly used to conduct
underwater surveys in order to plan the routing of pipes and cables, locate
shipwrecks and similar objects and determine the overall structure and nature of
the ocean bottom.
Sub bottom profilers also utilize a towfish and topside electronic control
and display devices. The towfish emits acoustic signals which penetrate the
surface of the sea floor. Some of the acoustic energy is reflected back and
received by the towfish. These reflected signals are processed electronically
and by software and are used to generate a visual image of the structure beneath
the sea floor. Sub bottom profilers are used to locate buried objects such as
shipwrecks, shallow mineral deposits and to aid in hydrographic surveys by
providing information about the seabed structure.
i. Contract Research and Engineering Services
The Company periodically performs research under contract and custom
engineering design for both commercial and government agencies. Generally these
contract research and development activities support the Company's primary
product development efforts and are used to offset a portion of the costs
associated with advanced research and development. Revenues from these
activities have not been significant.
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:
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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 the containers on a production line
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. TapTone 100
The TapTone 100 system is a low cost universal inspection system that 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. TapTone 100 systems are normally used
to inspect steel and aluminum cans. TapTone 100 systems are on-line, high speed
inspection systems designed to test 100% of the containers on a production line,
rejecting containers that are determined to be defective. TapTone 100 systems
are self contained inspection systems and may be fitted with a variety of
optional sensors for additional inspections such as label presence, cocked cap
and missing cap.
c. Turbo Tracker
The Turbo Tracker system uses a proximity sensor and digital signal
processing 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. A typical Turbo Tracker system consists of a sensor assembly, an
electronic control and display unit, and a rejector for removing defective
containers from the production line. The Turbo Tracker is also available in a
case configuration.
d. Laser Tracker
The Laser Tracker system is similar to the Turbo 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 or vacuum
inside the container and are used to determine container quality based upon
preset criteria.
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e. Squeezer
The Squeezer mechanically deforms a resilient container with a preset
force. These data are used to determine if the container is leaking based upon
preset criteria. Squeezers are typically used on squeezable packages, such as
plastic bottles, jugs, and pouches.
f. Ray TRAK
Ray TRAK 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 Ray TRAK. 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 Ray TRAK.
g. TapTone 500
The Company introduced the TapTone 500 inspection system during fiscal year
1999. The TapTone 500 system is an upgraded inspection platform designed to
eventually replace the current TapTone II acoustic inspection system and the
current Turbo Tracker system. The TapTone 500 system incorporates several
improvements over the Company's existing products and may be integrated with a
variety of optional sensors to accommodate additional inspections. The first
version of the TapTone 500 system designed for pressure or vacuum discrimination
in cans was introduced during the year and additional versions are planned for
the future.
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 internal staff of trained sales and marketing
personnel with experience and expertise in the markets served by the Company.
3. New Products.
During fiscal year 1999 the Company introduced the TapTone 100 low cost
universal inspection system. This addition to the TapTone product line is
designed to meet the inspection requirements of the domestic and international
food canning markets. The Company also introduced the TapTone 500 inspection
controller, designed to form a foundation for future inspection systems.
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4. Competition
Undersea Systems Division
The Company competes with a variety of companies in various product
markets. The Company's policy is to compete based upon technical superiority and
quality and to differentiate itself through strong post-sale support. 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.
In some markets, such as glass flotation and geophysical hydrophones, the
Company is one of the larger participants in the market. In other markets, such
as ROV systems, the Company is a minor participant and competes with larger,
well established companies that have significantly more resources than the
Company.
A partial listing of competitors for the various markets in which the
Company competes appears below:
Product Market Competitor(s)
Hydrophones Teledyne Brown Engineering
Glass Flotation Jenna Glass Works division of Schott
Glass Technologies, Inc.
ROV Systems Perry Tritech, Inc.; Hydrovision Ltd.;
SeaEye Marine Ltd.; Deep Ocean
Engineering, Inc.
Acoustics Edgetech, Inc.; Sonardyne International
Ltd.
Imaging Systems Kongsberg Simrad, Inc.
Side Scan Sonars Klein Associates, Inc.; Edgetech, Inc.
Relocation Pingers Dukane Corporation
Acoustic Modems Orca Instrumentation
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
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that compete with certain models offered by the Company. One German competitor
competes with the Company in the bottled beer leak detection market with
products substantially similar to those produced by the Company.
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 geophysical hydrophone product is
purchased from a single vendor, CTS Wireless Components, Inc., although 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 1999,
only two customers, Syntron, Inc. and Schlumberger, Ltd., 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. The
Company is also a licensee under an exclusive agreement with Syntron, Inc. for a
patent pertaining to the design of the Company's GeoPoint hydrophone product.
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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. Also,
certain hydrophone products must conform to regulations that limit the ability
of the hydrophone to be utilized for military applications. The Company does not
anticipate that these export restrictions will be removed in the near future.
During fiscal 1999, less than 5% of the sales of the Undersea Systems
Division were derived from military procurement contracts, primarily contracts
with the U.S. Navy.
9. Effect of Government Regulations
The Company is not aware of any government regulations or pending
legislation that would adversely affect the future sales of its products.
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 $1,307,000, $1,239,000, and $1,363,000 for the
fiscal years ended September 30, 1997, 1998 and 1999, 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, 1999, the Company employed 118 full-time individuals,
26 of whom were engaged in research and development, 59 in manufacturing and 33
in sales, marketing and administrative positions. Of the 118 full-time
employees, four are employed on a temporary basis. None of the Company's
employees is covered by a collective bargaining agreement. The Company believes
that it maintains good relations with its employees.
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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.
In connection with the Datasonics acquisition, the Company leased two
buildings in the Cataumet section of Bourne, Massachusetts, containing 20,000
square feet of space used for office, administration and manufacturing. These
leases expire August 19, 2000 and the Company is in the process of relocating
the Datasonics operations to its North Falmouth headquarters.
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.
PART II
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.
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
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stock dividend, paid to stockholders of record as of November 18, 1997.
Quarter Ended High Low
December 31, 1997 $19.33 $14.67
March 31, 1998 15.50 12.25
June 30, 1998 13.50 9.25
September 30, 1998 9.50 4.50
December 31, 1998 7.00 4.63
March 31, 1999 7.31 6.00
June 30, 1999 10.00 6.00
September 30, 1999 9.44 8.00
As of December 27, 1999, there were approximately 290 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, 1999 that were not registered under the Securities Act of
1933, other than the issuance of 8,595 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 manufacturer of oceanographic
products. Over the last 37 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.
On August 19, 1999, the Company acquired substantially all of the assets of
Datasonics, Inc., a manufacturer of underwater acoustic products, including side
scan sonar systems, acoustic relocation devices, high-speed underwater acoustic
modems and data telemetry systems. The sales and income from the acquired
business are included in the Company's results of operations for the last six
weeks of fiscal 1999.
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Results of Operations
The following table presents, for the periods indicated, certain
consolidated statements of income data. The Company has reclassified certain
prior year information to conform with the current year's presentation.
Year Ended
September 30,
--------------------------
1999 1998 1997
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(In Thousands)
Net sales $17,248 $14,038 $16,414
Cost of sales 9,801 7,529 7,639
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Gross profit 7,447 6,509 8,775
Selling, general and
administrative expenses 4,385 4,374 4,903
Research and development
expenses 1,363 1,239 1,307
In-process research and
development 750 - -
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Income from operations 949 896 2,565
Interest income 176 165 42
Interest expense (49) (41) (82)
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Income before provision
for income taxes 1,076 1,020 2,525
Provision for income taxes 248 305 967
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Net income $ 828 $ 715 $ 1,558
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The following table presents, for the periods indicated, the percentage
relationship of consolidated statements of income items to net sales.
Year Ended
September 30,
--------------------------
1999 1998 1997
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 56.8 53.6 46.5
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Gross profit 43.2 46.4 53.5
Selling, general and
administrative expenses 25.4 31.2 29.9
Research and development
expenses 7.9 8.8 8.0
In-process research and
development 4.4 -- --
----- ----- -----
Income from operations 5.5 6.4 15.6
Interest income 1.0 1.2 0.3
Interest expense (0.3) (0.3) (0.5)
----- ----- -----
Income before provision for
income taxes 6.2 7.3 15.4
Provision for income taxes 1.4 2.2 5.9
----- ----- -----
Net income 4.8% 5.1% 9.5%
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Years Ended September 30, 1999 and 1998.
Sales. Total sales increased 22.9% to $17,248,000 for fiscal year 1999 as
compared to $14,038,000 for fiscal year 1998. Sales by the Undersea Systems
Division increased by 31.0% to $12,174,000 for fiscal year 1999 as compared to
$9,290,000 for fiscal year 1998. This increase resulted primarily from increased
sales of the Company's geophysical hydrophone (used for offshore oil
exploration) and remotely operated vehicle (ROV) product lines and was somewhat
offset by decreases in sales of the Company's imaging and flotation product
lines. In addition, 1999 includes approximately six weeks' sales of the
Datasonics product lines acquired on August 19, 1999. Sales by the Container
Inspection Systems Division increased by 6.9% to $5,074,000 for fiscal year 1999
as compared to $4,748,000 for fiscal year 1998. This increase was attributable
to new products and an increase in international shipments.
Gross Profit. Gross profit increased by 14.4% to $7,447,000 for fiscal year 1999
as compared to $6,509,000 for fiscal year 1998. As a percentage of sales, gross
profit was 43.2% for fiscal year 1999 as compared to 46.4% for fiscal year 1998.
The decrease in the gross profit percentage is a result of a shift in product
mix
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towards Undersea Systems Division products which have lower margins than
Container Inspection Systems Division sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 0.3% to $4,385,000 for fiscal year 1999 as
compared to $4,374,000 for fiscal year 1998. The minor increase in these
expenses was a result of increases in overall Company expenses coinciding with
the increased sales volume and decreases in selling expenses related to expense
control and a reduction in commission expenses due to product mix. As a
percentage of sales, selling, general and administrative expenses decreased to
25.4% for fiscal year 1999 as compared to 31.2% for fiscal year 1998.
Research and Development Expenses. Research and development expenses increased
10.0% to $1,363,000 for fiscal year 1999 as compared to $1,239,000 for fiscal
year 1998. As a percentage of sales, research and development expenses were 7.9%
for fiscal year 1999 as compared to 8.8% for fiscal year 1998. Although the
total amount of research and development expenses increased in fiscal 1999,
consistent with the Company's current operational plans, the percentage of sales
represented by those expenses decreased as a result of increased sales volume.
In-Process Research and Development. On August 19, 1999, the Company acquired
substantially all of the assets and assumed certain liabilities of Datasonics,
Inc. The Company acquired Datasonics for approximately $6.7 million (including
acquisition costs) and recorded the acquisition under the purchase method of
accounting. As a result, a purchase price premium of $5.3 million was recorded
on the transaction. A significant portion of the purchase price was identified
in an independent appraisal, using proven valuation procedures and techniques,
as intangible assets. These intangible assets included approximately $750,000
for in-process research and development for projects that did not have future
alternative uses. This allocation represents the estimated fair market value
based on risk-adjusted cash flows related to the in-process research and
development projects. At the date of acquisition, the development of these
projects had not yet reached technological feasibility, and the in-process
research and development had no alternative future uses. Accordingly, these
costs were written off in the fiscal quarter ended September 30, 1999. The
remaining premium of $4.5 million was allocated to identifiable intangibles and
goodwill, and is being amortized to operations over 6 to 13 years, with an
average amortization period of approximately 8 1/2 years. The acquisition was
financed from borrowings under a $5.5 million note payable to a bank.
As of August 19, 1999, Datasonics' in-process research and development value was
comprised of six primary research and development programs that were expected to
reach completion during
17
<PAGE>
periods ranging from October 1999 through August 2000. At the acquisition date,
Datasonics' research and development programs ranged in completion from
approximately 41% to 61%, and total continuing research and development
commitments to complete the projects were expected to be approximately $400,000.
On the acquisition date, certain projects within the Datasonics research and
development programs were expected, if successful, to begin to bear results in
fiscal year 2000. Expenditures to complete the Datasonics projects were expected
to be approximately $400,000 in fiscal year 2000. These estimates are subject to
change, given the uncertainties of the development process, and no assurance can
be given that deviations from these estimates will not occur. Additionally,
these projects will require maintenance expenditures when and if they reach a
state of technological and commercial feasibility. Management believes the
Company is positioned to complete each of the major research and development
programs. However, there is risk associated with the completion of the projects,
and there is no assurance that any project will meet with either technological
or commercial success. The substantial delay or outright failure of the
Datasonics research and development could adversely impact the Company's
financial condition. See Note 2 of Notes to the Company's Consolidated Financial
Statements.
The value assigned to purchased in-process research and development was
determined by estimating the costs to develop Datasonics' purchased in-process
research and development into commercially viable products, estimating the
resulting net cash flows from the projects and discounting the net cash flows to
their present value. The revenue estimates used to value the in-process research
and development were based on estimates of relevant market sizes and growth
factors, expected trends in technology and the nature and expected timing of new
product introductions by the Company and its competitors. Discounting the net
cash flows back to their present value was based on the weighted average cost of
capital ("WACC"). The business enterprise is comprised of various types of
assets, each possessing different degrees of investment risk contributing to a
company's overall cost of capital. Intangible assets are assessed higher risk
factors due to their lack of liquidity and poor versatility for redeployment
elsewhere in the business. A discount rate of 17 percent was used for in-process
research and development. This rate is higher than the WACC due to the inherent
uncertainties surrounding the successful development of the purchased in-process
technology. The estimates used by the Company in valuing in-process research and
development were based upon assumptions the Company believes to be reasonable
but which are inherently uncertain and unpredictable. The Company's assumptions
may be incomplete or inaccurate, and no assurance can be given that
unanticipated events and circumstances will not occur. Accordingly, actual
results may vary from the projected results. Any such variance may result in a
material adverse effect on the financial condition and results of operations of
the Company.
18
<PAGE>
Interest Income. Interest income increased to $176,000 for fiscal year 1999 as
compared to $165,000 for fiscal year 1998. This increase resulted from higher
invested cash balances and was offset by lower available returns on the invested
cash balances.
Interest Expense. Interest expense was $49,000 for fiscal year 1999 as compared
to $41,000 for fiscal year 1998. The increase was a result of borrowing on the
$5.5 million term loan made in August 1999 in connection with the Datasonics
acquisition, as compared to the Company's elimination of short and long term
debt in 1998.
Provision for Income Taxes. The provision for income taxes decreased to $248,000
for fiscal year 1999 as compared to $305,000 for fiscal year 1998. The effective
tax rate used for fiscal year 1999 was 23.0% as compared to an effective tax
rate of 29.9% used in fiscal year 1998. The rate used in fiscal year 1999 is
lower than the statutory rate due to an increased benefit from the Company's
foreign sales corporation and other state tax credits as compared to the prior
year.
Years Ended September 30, 1998 and 1997
Sales. Total sales decreased 14.5% to $14,038,000 for fiscal year 1998 as
compared to $16,414,000 for fiscal year 1997. Sales by the Undersea Systems
Division decreased by 3.1% to $9,290,000 for fiscal year 1998 as compared to
$9,591,000 for fiscal year 1997. This decrease resulted primarily from decreased
sales of the Company's acoustic and glass flotation product lines and was
somewhat offset by increases in sales of the Company's imaging, hydrophone (used
for offshore oil exploration), and remotely operated vehicle (ROV) product
lines. Sales by the Container Inspection Systems Division decreased by 30.4% to
$4,748,000 for fiscal year 1998 as compared to $6,823,000 for fiscal year 1997.
This decrease was attributable to fewer large project orders and the effects of
the Asian financial crisis, which caused some Asian customers to delay orders.
Gross Profit. Gross profit decreased by 25.8% to $6,509,000 for fiscal year 1998
as compared to $8,775,000 for fiscal year 1997. As a percentage of sales, gross
profit was 46.4% for fiscal year 1998 as compared to 53.5% for fiscal year 1997,
as a result of decreased sales of the Company's Container Inspection Systems
Division (which has higher profit margins) and start-up expenses incurred in
fiscal year 1998 related to the Company's Undersea Systems Division's new
Geopoint acoustic hydrophone product line.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 10.8% to $4,374,000 for fiscal year 1998 as
compared to $4,903,000 for fiscal year 1997. The decrease in these expenses was
a result of lower commission and selling expenses relating to the decreased
sales volume, reductions
19
<PAGE>
in overall Company expenses coinciding with this reduced sales volume and a
nonrecurrence of the expenses related to the registration and listing of the
Company's securities which occurred in fiscal year 1997. As a percentage of
sales, selling, general and administrative expenses increased to 31.2% for
fiscal year 1998 as compared to 29.9% for fiscal year 1997.
Research and Development Expenses. Research and development expenses decreased
5.2% to $1,239,000 for fiscal year 1998 as compared to $1,307,000 for fiscal
year 1997. As a percentage of sales, research and development expenses were 8.8%
for fiscal year 1998 as compared to 8.0% for fiscal year 1997. The increase in
percentage of sales is a result of investments in new product development and
reduced sales volume and is consistent with the Company's current operational
plans.
Interest Income. Interest income increased to $165,000 for fiscal year 1998 as
compared to $42,000 for fiscal year 1997. This increase resulted from higher
invested cash balances.
Interest Expense. Interest expense decreased 50% to $41,000 for fiscal year 1998
as compared to $82,000 for fiscal year 1997. The decrease was a result of no
borrowing on the credit line in fiscal year 1998 and the elimination of the
Company's short and long term debt in 1998.
Provision for Income Taxes. The provision for income taxes decreased to $305,000
for fiscal year 1998 as compared to $967,000 for fiscal year 1997. The effective
tax rate used for fiscal year 1998 was 29.9% as compared to an effective tax
rate of 38.3% used in fiscal year 1997. The rate used in fiscal year 1998 is
lower than the statutory rate due to the benefit from the Company's foreign
sales corporation and other state tax credits which benefitted the Company in
fiscal year 1998.
Liquidity and Capital Resources
The Company's principal capital requirement is to provide working capital
to support growth.
As of September 30, 1999 the Company had cash and cash equivalents of
$2,930,000 compared to a balance of $2,509,000 on September 30, 1998. Operating
income for the fiscal year ended September 30, 1999 was $949,000 as compared to
$896,000 for the fiscal year ended September 30, 1998. Accounts receivable
decreased by $355,000 as a result of improved collections. Inventories increased
by $919,000 to support early fiscal year 2000 shipments. Deferred tax assets
increased by $648,000 as the result of an increase in refundable income taxes.
Accounts payable increased by $226,000 as purchasing activities increased to
support necessary inventory levels. Accrued expenses increased by $405,000 as a
result of higher profit sharing expenses and current income taxes payable. Net
cash provided by operating activities increased to $1,588,000 for fiscal year
1999 as compared to $1,095,000 for fiscal year 1998.
20
<PAGE>
In the fiscal year ended September 30, 1999, the Company used $6,689,000
for investing activities. Of this total, $181,000 was used to purchase property,
plant, and equipment and $6,729,000 represents cash paid in connection with the
Datasonics acquisition.
Cash provided by financing activities for the fiscal year ended September
30, 1999 was $5,522,000. Included in this were borrowings on long-term debt of
$5,500,000 used to finance the Datasonics acquisition, $45,000 from the exercise
of stock options, and $42,000 from the sale of treasury stock to the ESOP.
The Company has a secured line of credit for $2,000,000. As of September
30, 1999, the Company had no outstanding advances against the line of credit.
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 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.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. As the Company does not currently engage in
derivatives or hedging transactions, there will be no current impact to the
Company's results of operations, financial position or cash flows upon the
adoption of SFAS No. 133.
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 channel development, and geographical market development. In
addition, the Company will continue its efforts at identifying and pursuing
strategically compatible product and/or company acquisitions.
21
<PAGE>
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 also believes that the underwater data telemetry market is an
emerging market that will continue to develop during the next several years and
the Company intends to devote some of its resources towards capitalizing on this
developing market.
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 plans to maintain its focus on the domestic and international
beer market by improving its traditional leak detection equipment and by
developing other products that provide increased inspection capability to
brewers. The Company also plans to continue to develop its presence in the food
packaging market through enhanced marketing efforts coupled with product
development initiatives.
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
22
<PAGE>
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 the fiscal year ended September 30, 1999, sales
of the Undersea Systems Division increased to 71% of total Company sales as
compared to 66% for the prior fiscal year, while sales of the Container
Inspection Systems Division decreased to 29% of total Company sales as compared
to 34% for the prior fiscal year. The increase in sales from fiscal year 1998 to
fiscal year 1999 was 31% for the Undersea Systems Division and 7% for the
Container Inspection Systems Division. This resulted in an overall gross profit
for the Company of 43.2% for the fiscal year ended September 30, 1999 as
compared to 46.4% for the fiscal year ended September 30, 1998.
Undersea Systems Division
Gross profit margins on Undersea Systems Division products average
approximately 47.4%. The Company expects that the overall sales mix of its
undersea products will shift slightly in the future due to decreased 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 margins
within other product lines.
Container Inspection Systems Division
Gross profit margins on Container Inspection Systems Division products
average approximately 54.5%. The Company expects that the sales mix of different
products will not significantly change and will not adversely affect overall
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.
23
<PAGE>
Forward-Looking Information
The statements made in this report and in oral statements which may be made
by representatives of the Company relating to plans, strategies, economic
performance and trends and other statements that are not descriptions of
historical facts may be forward-looking statements within the meaning of the
Private Securities Litigation Reform Act, Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. Such information
includes information relating to the Company which is 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 inherent risks,
uncertainties and assumptions relating to the operations and results of
operations of the Company, the timing of large project orders, competitive
factors, shifts in customer demand, government spending, economic cycles,
availability of financing as well as the factors described in this report.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results or outcomes may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended.
Year 2000 Issues
During 1998 and 1999, the Company was actively engaged in addressing Year
2000 ("Y2K") issues, which result from the use of two-digit, rather than four-
digit, year dates in software, a practice which could cause date-sensitive
systems to malfunction or fail because they may not recognize or process date
information correctly.
State of Readiness: To manage its Y2K program, the Company has divided its
efforts into four program areas:
. Information Technology (computer hardware and software)
. Physical Plant (manufacturing equipment and facilities)
. Products (including product development)
. Extended Enterprise (suppliers and customers)
For each of these program areas, the Company has used a four-step approach:
24
<PAGE>
. Ownership (creating awareness, assigning tasks)
. Inventory (listing items to be assessed for Y2K readiness)
. Assessment (prioritizing the inventoried items, assessing their Y2K
readiness, planning corrective actions, developing initial
contingency plans)
. Corrective Action Deployment (implementing corrective actions,
verifying implementation, finalizing and executing contingency plans)
As of September 30, 1999, the Ownership, Inventory, Assessment and
Corrective Action Development steps were essentially complete for all program
areas.
Costs to Address Y2K Issues: The Company began incurring expenses in 1997
to resolve this issue. All expenditures have been expensed as incurred and have
not had (and are not expected to have) a significant impact on the Company's
ongoing results of operations.
Risks of Y2K Issues and Contingency Plans: The Company has been in the
process of assessing the Year 2000 issues relating to its physical plant,
products and suppliers. The Company has developed a contingency planning process
to mitigate worst-case business disruptions such as delays in product delivery,
which could potentially result from events such as supply chain disruptions. The
Company expects its contingency plans to be complete by December 31, 1999.
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-20 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
25
<PAGE>
PART III
The information required by Part III of this report is incorporated by
reference from the registrant's definitive proxy statement for its 2000 annual
meeting of stockholders to be filed with the Commission in accordance with Rule
14a-101, Schedule 14A, on or before January 28, 2000.
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.
(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) On November 2, 1999, the Registrant filed an amendment on Form 8-K/A
containing financial statements and pro forma financial information
regarding the acquisition of Datasonics, Inc., which was earlier
reported on Form 8-K filed on August 27, 1999.
26
<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 JOHN L. COUGHLIN
---------------------------
John L. Coughlin,
President
Date: December 17, 1999
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.
JOHN L. COUGHLIN President, Chief Executive December 17, 1999
- -------------------------
John L. Coughlin Officer and Director
FRANCIS E. DUNNE, JR. Treasurer and Chief December 17, 1999
- -------------------------
Francis E. Dunne, Jr. Financial Officer
(principal financial
and accounting officer)
STEPHEN D. FANTONE Chairman of the Board of
- -------------------------
Stephen D. Fantone Directors December 20, 1999
SAMUEL O. RAYMOND Director December 23, 1999
- -------------------------
Samuel O. Raymond
A. THEODORE MOLLEGEN, JR. Director December 27, 1999
- -------------------------
A. Theodore Mollegen, Jr.
THURMAN F. NAYLOR Director December 20, 1999
- -------------------------
Thurman F. Naylor
GARY K. WILLIS Director December 20, 1999
- -------------------------
Gary K. Willis
27
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
INDEX
Page
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of September 30, 1999 and 1998 F-2
Consolidated Statements of Income for the Years Ended
September 30, 1999, 1998 and 1997 F-3
Consolidated Statements of Stockholders' Investment for the
Years Ended September 30, 1999, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1999, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
<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, 1999 and 1998, and
the related consolidated statements of income, stockholders' investment and cash
flows for each of the three years in the period ended September 30, 1999. 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, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 1999,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
October 29, 1999
F-1
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(In Thousands, except share and per share data)
<TABLE>
<CAPTION>
Assets
September 30,
1999 1998
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,930 $ 2,509
Accounts receivable, less reserves of approximately $220 and $175 at
September 30, 1999 and 1998, respectively 2,432 1,609
Inventories 4,794 2,793
Prepaid expenses and other current assets 734 630
Deferred tax asset 1,299 651
--------- --------
Total current assets 12,189 8,192
--------- --------
Property, Plant and Equipment, at cost:
Land 127 127
Buildings and improvements 1,876 1,878
Equipment and fixtures 3,464 2,921
Demonstration equipment 1,174 1,352
--------- --------
6,641 6,278
Less--Accumulated depreciation 4,862 4,418
--------- --------
1,779 1,860
--------- --------
Other Assets, net 4,819 580
--------- --------
$ 18,787 $ 10,632
========= ========
Liabilities and Stockholders' Investment
Current Liabilities:
Current maturities of long-term debt $ 786 $ -
Accounts payable 1,292 990
Accrued expenses 2,311 962
Customer deposits 391 237
--------- --------
Total current liabilities 4,780 2,189
--------- --------
Long-term Debt, net of current maturities 4,649 -
--------- --------
Commitments (Note 10)
Stockholders' Investment:
Common stock, $.0667 par value-
Authorized--7,500,000 shares
Issued--1,649,081 and 1,634,865 shares at September 30, 1999 and 1998,
respectively 110 109
Capital in excess of par value 1,546 1,502
Retained earnings 8,437 7,609
Treasury stock, at cost (735) (777)
--------- --------
Total stockholders' investment 9,358 8,443
--------- --------
$ 18,787 $ 10,632
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
Benthos, Inc. and Subsidiary
Consolidated Statements of Income
(In Thousands, except share and per share data)
<TABLE>
<CAPTION>
Years Ended September 30,
1999 1998 1997
<S> <C> <C> <C>
Net Sales $ 17,248 $ 14,038 $ 16,414
Cost of Sales 9,801 7,529 7,639
---------- ---------- ----------
Gross profit 7,447 6,509 8,775
Selling, General and Administrative Expenses 4,385 4,374 4,903
Research and Development Expenses 1,363 1,239 1,307
In-Process Research and Development 750 - -
---------- ---------- ----------
Income from operations 949 896 2,565
Interest Income 176 165 42
Interest Expense (49) (41) (82)
---------- ---------- ----------
Income before provision for income taxes 1,076 1,020 2,525
Provision for Income Taxes 248 305 967
---------- ---------- ----------
Net income $ 828 $ 715 $ 1,558
========== ========== ==========
Basic Earnings Per Share (Note 9) $ .61 $ .54 $ 1.27
========== ========== ==========
Diluted Earnings Per Share (Note 9) $ .60 $ .52 $ 1.14
========== ========== ==========
Weighted Average Number of Shares Outstanding 1,355,291 1,314,323 1,225,722
========== ========== ==========
Weighted Average Number of Shares Outstanding, 1,386,796 1,387,130 1,370,375
Assuming Dilution ========== ========== ==========
</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
(In Thousands, except share and per share data)
<TABLE>
<CAPTION>
Common Stock Capital in Treasury Stock, at cost Total
Number of $.0667 Par Excess of Par Retained Number of Stockholders'
Shares Value Value Earnings Shares Amount Investment
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1996 1,510,178 $101 $ 774 $5,336 300,338 $(898) $5,313
Sale of treasury stock - - - - (5,390) 51 51
Exercise of stock options,
including tax benefit 75,937 5 496 - - - 501
Net income - - - 1,558 - - 1,558
--------- ---- ------ ------ ------- ----- ------
Balance, September 30, 1997 1,586,115 106 1,270 6,894 294,948 (847) 7,423
Sale of treasury stock - - - - (3,823) 70 70
Exercise of stock options,
including tax benefit 48,750 3 232 - - - 235
Net income - - - 715 - - 715
--------- ---- ------ ------ ------- ----- ------
Balance, September 30, 1998 1,634,865 109 1,502 7,609 291,125 (777) 8,443
Sale of treasury stock - - - - (8,592) 42 42
Exercise of stock options 14,250 1 44 - - - 45
Net income - - - 828 - - 828
--------- ---- ------ ------ ------- ----- ------
Balance, September 30, 1999 1,649,081 $110 $1,546 $8,437 282,533 $(735) $9,358
========= ==== ====== ====== ======= ===== ======
</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
(In Thousands)
<TABLE>
<CAPTION>
Years Ended September 30,
1999 1998 1997
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 828 $ 715 $1,558
Adjustments to reconcile net income to net cash provided by operating
activities-
Write-off of acquired in-process research and development 750 - -
Depreciation and amortization 512 350 621
Deferred income taxes (648) (135) (59)
Changes in assets and liabilities, net of effect from acquisition of
Datasonics, Inc.-
Accounts receivable 355 561 (651)
Inventories (919) (730) 1,489
Prepaid expenses and other current assets (75) (27) (74)
Accounts payable and accrued expenses 631 265 (426)
Customer deposits 154 96 (134)
------- ------ ------
Net cash provided by operating activities 1,588 1,095 2,324
------- ------ ------
Cash Flows from Investing Activities:
Purchase of property, plant and equipment (181) (215) (504)
Decrease (increase) in other assets 221 (380) (106)
Net cash paid in connection with the Datasonics, Inc. acquisition (6,729) - -
------- ------ ------
Net cash used in investing activities (6,689) (595) (610)
------- ------ ------
Cash Flows from Financing Activities:
Payments on note payable (65) - -
Sale of treasury stock 42 70 51
Exercise of stock options, net of tax benefit 45 101 176
Borrowings of long-term debt 5,500 - -
Payments on long-term debt, net - (825) (29)
------- ------ ------
Net cash provided by (used in) financing activities 5,522 (654) 198
------- ------ ------
Net Increase (Decrease ) in Cash and Cash Equivalents 421 (154) 1,912
Cash and Cash Equivalents, beginning of year 2,509 2,663 751
------- ------ ------
Cash and Cash Equivalents, end of year $ 2,930 $2,509 $2,663
======= ====== ======
Supplemental Disclosure of Cash Flow Information:
Interest paid during the year $ 35 $ 41 $ 82
======= ====== ======
Income taxes paid during the year, net of refunds $ 376 $ (38) $1,624
======= ====== ======
Supplemental Disclosure of Noncash Activities:
Tax benefit for exercise of stock options $ - $ 134 $ 325
======= ====== ======
Supplemental Disclosure of Cash Flows Related to Acquisition:
In connection with the acquisition of Datasonics, Inc. (Note 2), the
following transactions occurred-
Fair value of assets acquired $ 7,749 $ - $ -
Liabilities assumed (1,020) - -
------- ------ ------
Cash paid, including $721 for direct costs of acquisition $ 6,729 $ - $ -
======= ======= =======
</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
(In Thousands, except share and per share data)
(1) Operations and Significant Accounting Policies
Benthos, Inc. (the Company) designs, manufactures, sells and services
oceanographic products and systems for underwater exploration, oil and gas
development and production, 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 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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Raw materials $ 891 $ 81
Work-in-process 3,861 2,702
Finished goods 42 10
------ ------
$4,794 $2,793
====== ======
</TABLE>
F-6
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, except share and per share data)
(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:
Estimated
Asset Classification Useful Life
Buildings and improvements 15-33 years
Equipment and fixtures 5 years
Demonstration equipment 3 years
(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. Under SFAS No. 121, the Company is
required to assess the valuation of its long-lived assets, including
intangible assets, based on the estimated cash flows to be generated
by such assets. Based on its most recent analysis, the Company
believes that no material impairment of intangible assets exists as of
September 30, 1999.
Intangible assets, resulting from Datasonics Acquisition (Note 2), are
included in "Other Assets" on the face of the consolidated balance
sheets and are amortized on a straight-line basis, based on their
estimated lives, as follows:
<TABLE>
<CAPTION>
Estimated September 30,
------------------------
Life 1999 1998
<S> <C> <C> <C>
Developed technology 6 years $ 1,430 $ -
Assembled workforce 6 years 200 -
Goodwill 13 years 2,898 -
-------- ----------
4,528 -
Less--Accumulated amortization 38 -
-------- ----------
$ 4,490 $ -
========= ==========
</TABLE>
F-7
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, except share and per share data)
(Continued)
(g) Revenue Recognition and Warranty Costs
The Company recognizes revenue upon shipment and provides for estimated
warranty costs at that time. Amounts received from customers for future
delivery are shown as customer deposits in the accompanying
consolidated balance sheets.
(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. The Company has no
significant off-balance-sheet concentration of credit risk such as
foreign exchange contracts, options contracts or other foreign hedging
arrangements. 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 rated financial institutions. In 1999, two
customers accounted for 14% and 12% of net sales, respectively. In 1998
and 1997, one customer accounted for approximately 22% and 16% of net
sales, respectively. As of September 30, 1999, one customer accounted
for 15% of accounts receivable. At September 30, 1998, one customer
accounted for approximately 30% of accounts receivable. The Company has
not experienced significant losses related to receivables from
individual customers or groups of customers in any specific industry or
geographic area. Due to these factors, no additional credit risk beyond
amounts provided for collection losses is believed by management to be
probable in the Company's accounts receivable.
The changes in the accounts receivable reserve are as follows:
<TABLE>
<CAPTION>
Balance, Charged to Balance,
Beginning of Costs and Acquired End of
Period Expenses Reserve(1) Deductions Period
<S> <C> <C> <C> <C> <C>
For the year ended
September 30,
1997 $ 127 $ 56 $ - $ 21 $ 162
1998 162 13 - - 175
1999 175 8 45 8 220
</TABLE>
/(1)/ Represents reserve acquired as part of the Datasonics acquisition
(see Note 2).
F-8
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, except share and per share data)
(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.
(k) New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives)
and for hedging activities. SFAS No. 133, as amended by SFAS No. 137,
is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. As the Company does not currently engage in derivatives
or hedging transactions, there will be no current impact to the
Company's results of operations, financial position or cash flows upon
the adoption of SFAS No.133.
(l) Comprehensive Income
The Company has adopted SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires disclosure of all components of comprehensive
income on an annual and interim basis. Comprehensive income is defined
as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources.
Comprehensive income is the same as net income for all periods
presented.
F-9
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, except share and per share data)
(Continued)
(2) Acquisition of Datasonics, Inc.
In August 1999, the Company acquired substantially all of the assets
of Datasonics, Inc. (Datasonics). This acquisition was accounted for
as a purchase in accordance with Accounting Principles Board (APB)
Opinion No. 16, Business Combinations. To fund the purchase, the
Company entered into a $5.5 million note payable with a bank (see Note
5). The aggregate purchase price of approximately $6,732 (which
consisted of a $6,011 of cash and $721 of direct acquisition costs)
was allocated based on the fair value of the tangible and intangible
assets acquired as follows:
<TABLE>
<S> <C>
Cash $ 3
Current assets 2,289
Property and equipment 182
Acquired intangibles (Note 1(f)) 4,528
Purchased incomplete research and development 750
Assumed liabilities (1,020)
-------
$ 6,732
=======
</TABLE>
In connection with the purchase price allocation, the Company obtained an
independent appraisal of the intangible assets acquired. Acquired
intangibles include acquired technology, goodwill and an assembled workforce.
These intangibles are being amortized over their estimated useful lives of
six to 13 years. The portion of the purchase price allocated to the
purchased incomplete research and development projects that had not yet
reached technological feasibility and did not have a future alternative use,
totaling $750, was charged to expense as of the acquisition date. The amount
allocated to the purchased incomplete research and development projects
represents the estimated fair value related to these projects determined by
an independent appraisal. Proven valuation procedures and techniques were
used in determining the fair market value of each intangible asset. To bring
these projects to technological feasibility, high-risk developmental and
testing issues needed to be resolved, which required substantial additional
effort and testing.
F-10
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, except share and per share data)
(Continued)
Unaudited pro forma operating results for the Company, assuming the
acquisition of Datasonics occurred as of the beginning of the years
presented, are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
1999/(1)/ 1998/(1)/
<S> <C> <C>
Pro forma total revenues $24,717 $21,355
======= =======
Pro forma net income $ 897 $ 440
======= =======
Pro forma net income per share-
Basic $ .66 $ .34
======= =======
Diluted $ .65 $ .32
======= =======
</TABLE>
/(1)/ For the purposes of these pro forma operating results, the charge
for in-process research and development was excluded, so that the
operating results presented include only recurring costs.
Fiscal 1999 represents the results of Benthos for the year ended September
30, 1999 combined with Datasonics results from October 1, 1998 through the
date of the acquisition.
(3) Accrued Expenses
Accrued expenses consist of the following at September 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Accrued salary and related expenses $ 653 $ 384
Accrued warranty 287 244
Accrued taxes 460 -
Accrued transaction costs 475 -
Other accrued expenses 436 334
------ ------
$2,311 $ 962
====== ======
</TABLE>
F-11
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, except share and per share data)
(Continued)
(4) Demand Note Payable
As of September 30, 1999, the Company has a $2,000 secured line of credit
with a bank expiring on January 31, 2000. There were no amounts outstanding
under this line of credit at September 30, 1999. Borrowings under this
agreement are payable on demand and bear interest at the Wall Street
Journal's reported prime rate (8.25% at September 30, 1999) less .25%. The
Company is required to maintain certain covenants, including debt service
coverage. The Company was in compliance with all covenants at September 30,
1999.
(5) Note Payable
On August 18, 1999, the Company entered into a $5,500 note payable with a
bank. The note is secured by substantially all of the assets of the Company
and is due in 84 monthly installments with interest at prime (8.25% at
September 30, 1999) less .25%. The Company has fixed the interest rate at
7.75% for the first year of the note. After the first year, or at any time
during the during the term of the note, the Company may elect to fix the
interest rate at 2.25% above the Federal Home Loan Bank of Boston Rate
(5.97% at September 30, 1999), as defined, or the Company can continue to
pay interest at prime less .25%. Payments under this note end in August
2006. The Company is required to maintain certain covenants, including debt
service coverage. The Company was in compliance with all covenants at
September 30, 1999.
(6) 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.
F-12
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, except share and per share data)
(Continued)
The components of the provision for income taxes for each of the three years
in the period ended September 30, 1999 are as follows:
1999 1998 1997
Federal-
Current $ 781 $ 372 $ 785
Deferred (597) (138) (45)
----- ----- -----
184 234 740
----- ----- -----
State-
Current 115 68 241
Deferred (51) 3 (14)
----- ----- -----
64 71 227
----- ----- -----
$ 248 $ 305 $ 967
===== ===== =====
The Company's effective tax rate differed from the statutory rate for the
reasons set forth below:
1999 1998 1997
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit 3.9 3.5 6.2
Tax benefit of foreign sales corporation (4.3) (5.0) (2.4)
Tax credits (13.3) (3.6) -
Other 2.7 1.0 .5
----- ---- -----
Effective tax rate 23.0% 29.9% 38.3%
===== ==== =====
The components of the net deferred tax asset recognized in the accompanying
consolidated balance sheets are as follows:
1999 1998
Acquisition related intangibles $ 226 $ -
Inventory reserves 595 536
Other nondeductible reserves and accruals 524 161
Valuation allowance (46) (46)
------ -----
Net deferred tax asset $1,299 $ 651
====== =====
F-13
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, except share and per share data)
(Continued)
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 Company
has recorded a valuation allowance of $46 for certain temporary
differences, about which the Company believes there is uncertainty
regarding realizability.
(7) Stock Split
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.
(8) 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
10 years from the date of grant. At September 30, 1999, 161,250 shares
of common stock were reserved for issuance upon exercise of the
nonqualified stock options. At September 30, 1999, 105,000 shares were
available for future grant.
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 (the Board) 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 of the shares at the date of grant. At September 30,
1999, 54,437 shares were available for future grant.
F-14
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, except share and per share data)
(Continued)
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
1990 Plan Director Options
Number of Weighted Weighted
Shares Average Number of Average
Option Price Shares Option Price
<S> <C> <C> <C> <C>
Outstanding, September 30, 1996 171,750 $ 3.19 45,000 $ 1.83
Granted 29,250 11.36 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
Granted 31,500 17.54 30,000 13.81
Terminated (10,500) 17.54 - -
Exercised (3,750) 2.04 (45,000) 1.83
------- -------
Outstanding, September 30, 1998 134,813 7.79 41,250 13.18
Granted 38,750 6.25 15,000 6.44
Terminated (7,688) 10.10 - -
Exercised (14,250) 3.13 - -
------- -------
Outstanding, September 30, 1999 151,625 $ 7.71 56,250 $11.38
======= ====== ======= ======
Exercisable, September 30, 1999 65,254 $ 6.63 17,500 $12.82
======= ====== ======= ======
Exercisable, September 30, 1998 47,254 $ 5.05 3,750 $11.50
======= ====== ======= ======
Exercisable, September 30, 1997 10,125 $ 4.33 37,500 $ 1.85
======= ====== ======= ======
</TABLE>
F-15
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, except share and per share data)
(Continued)
The range of exercise prices for options outstanding and options
exercisable at September 30, 1999 for the 1990 Plan is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$ 4.33 67,875 6.5 $ 4.33 48,000 $ 4.33
$ 6.25 38,750 9.4 6.25 - -
$ 10.16-11.50 24,000 7.3 11.05 12,000 11.05
$ 17.54 21,000 8.1 17.54 5,254 17.54
------- ------
151,625 7.6 $ 7.71 65,254 $ 6.63
======= === ====== ====== ======
</TABLE>
The range of exercise prices for options outstanding and options
exercisable at September 30, 1999 for director stock options is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$ 6.44 15,000 9.3 $ 6.44 - $ -
$ 11.50-14.25 41,250 6.8 13.18 17,500 12.82
------ ------
56,250 7.4 $11.38 17,500 $12.82
====== === ====== ====== ======
</TABLE>
F-16
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, except share and per share data)
(Continued)
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 employees under APB Opinion No. 25 and elect the disclosure-only
alternative under SFAS No. 123 for stock-based compensation awarded in
1999, 1998 and 1997 using the Black-Scholes option pricing model
prescribed by SFAS No. 123. The underlying assumptions used are as
follows:
<TABLE>
<CAPTION>
September 30,
1999 1998 1997
<S> <C> <C> <C>
Risk-free interest rate 4.80% 4.38% 6.20%
Expected dividend yield - - -
Expected life (years) 7 7 7
Expected volatility 48% 65% 40%
</TABLE>
The weighted average fair value of options granted during the years ended
September 30, 1999, 1998 and 1997 under these plans is $3.51, $10.51 and
$5.90, 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,
1999 1998 1997
<S> <C> <C> <C>
Net income-
As reported $ 828 $ 715 $1,558
Pro forma 525 445 1,463
Basic earnings per share-
As reported $ .61 $ .54 $ 1.27
Pro forma .39 .34 1.19
Diluted earnings per share-
As reported $ .60 $ .52 $ 1.14
Pro forma .38 .32 1.07
</TABLE>
F-17
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, except share and per share data)
(Continued)
(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, 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 years based on years of completed service, as defined. The
accompanying consolidated statements of income for the years ended
September 30, 1999, 1998 and 1997 include provisions for contributions to
the ESOP of approximately $74, $41, and $71, 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 in an amount determined by the Board. These
contributions vest to a participant's account ratably over five years
based on years of completed service, as defined. Additionally, each
participant may elect to contribute up to 20% of his or her compensation
for the plan year, but not more than $10,000 (for calendar 1999), to the
plan. The accompanying consolidated statements of income for the years
ended September 30, 1999, 1998 and 1997 include provisions for
contributions to the plan of approximately $74, $41, and $210,
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, 1999.
(9) Earnings per Share
Basic earnings per share were computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share were computed by dividing net income by diluted
weighted average number of common and common equivalent shares outstanding
during the period. The weighted average number of common equivalent shares
outstanding has been determined in accordance with the treasury-stock
method. Common stock equivalents consist of common stock issuable upon the
exercise of outstanding options.
F-18
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, except share and per share data)
(Continued)
A reconciliation of basic and diluted shares outstanding is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Weighted average common shares 1,355,291 1,314,323 1,225,722
outstanding
Effect of dilutive securities 31,505 72,807 144,653
--------- --------- ---------
Weighted average common shares 1,386,796 1,387,130 1,370,375
outstanding, assuming dilution ========= ========= =========
</TABLE>
As of September 30, 1999 and 1998, 106,719 and 91,500 options,
respectively, were outstanding but not included in the diluted weighted
average common share calculation as the effect would have been
antidilutive. As of September 30, 1997, there were no antidilutive shares.
(10) Employment and Noncompetition Agreement
The Company has an employment and noncompetition agreement, as amended,
with a director/stockholder. In connection with the employment agreement,
the Company has agreed to provide a $1,500 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 $86, $85, and $93 related to this
agreement is included in the accompanying 1999, 1998 and 1997 consolidated
statements of income, respectively.
(11) Segment Reporting
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, in the fiscal year ended September 30,
1999. SFAS No. 131 establishes standards for reporting information
regarding operating segments in annual financial statements and requires
selected information of those segments to be presented in interim financial
reports issued to stockholders. SFAS No. 131 also establishes standards for
related disclosures about products and services and geographic areas.
Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation
by the chief operating decision maker, or decision making group, in making
decisions on how to allocate resources and assess performance. The
Company's chief decision-maker, as defined under SFAS No. 131, is a
combination of the president, the chief financial officer and other
operating officers. To date, the Company has viewed its operations and
F-19
<PAGE>
BENTHOS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, except share and per share data)
(Continued)
manages its business as two segments, Undersea Systems and Container
Inspection Systems, as being strategic business units that offer different
products. The Company evaluates the performance of its operating segments
based on revenues from external customers, income from operations and
identifiable assets.
<TABLE>
<CAPTION>
Years Ended September 30,
1999 1998 1997
<S> <C> <C> <C>
Sales to unaffiliated customers-
Undersea systems $12,174 $ 9,290 $ 9,591
Container inspection systems 5,074 4,748 6,823
------- ------- -------
Total $17,248 $14,038 $16,414
======= ======= =======
Income from operations-
Undersea systems $ 742 $ 761 $ 1,355
Container inspection systems 207 135 1,210
------- ------- -------
Total $ 949 $ 896 $ 2,565
======= ======= =======
Identifiable assets-
Undersea systems $11,116 $ 4,843 $ 3,555
Container inspection systems 2,349 2,074 2,639
Corporate assets 5,322 3,715 3,882
------- ------- -------
Total $18,787 $10,632 $10,076
======= ======= =======
</TABLE>
Revenues by geographic area for the years ended September 30, 1999, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
Geographic Area 1999 1998 1997
<S> <C> <C> <C>
United States $ 6,257 $ 6,954 $ 9,438
Norway 2,195 165 259
United Kingdom 1,694 1,659 496
Japan 1,168 755 929
Trinidad 1,001 - -
Mexico 560 702 59
Other 4,373 3,803 5,233
------- ------- -------
$17,248 $14,038 $16,414
======= ======= =======
</TABLE>
(12) Related Party
The Company had research and development services performed by an entity
controlled by the Company's chairman of the Board. The Company expensed
approximately $20, $21 and $314 for these services in fiscal 1999, 1998 and
1997, respectively.
F-20
<PAGE>
BENTHOS, INC.
EXHIBIT INDEX
Exhibit
-------
3.1 Restated Articles of Organization (1)
3.2 Articles of Amendment dated April 28, 1997 (2)
3.3 Articles of Amendment dated April 20, 1998 (5)
3.4 By-Laws (1)
3.5 By-Law Amendments adopted January 23, 1998 (4)
4.1 Common Stock Certificate (1)
10.1 Employment Contract with Samuel O. Raymond (1)
10.2 Amendment to Employment Contract with Samuel O. Raymond (2)
10.3 Employment Contract with John L. Coughlin (1)
10.4 Employee Stock Ownership Plan (1)
10.5 First Amendment to Employee Stock Ownership Plan (2)
10.6 Second Amendment to Employee Stock Ownership Plan
10.7 Third Amendment to Employee Stock Ownership Plan
10.8 401(k) Retirement Plan (1993)(1)
10.9 401(k) Retirement Plan (1999)
10.10 First Amendment to 401(k) Retirement Plan (2)
10.11 Second Amendment to 401(k) Retirement Plan (2)
10.12 Third Amendment to 401(k) Retirement Plan (3)
10.13 Supplemental Executive Retirement Plan (1)
10.14 1990 Stock Option Plan (1)
10.15 Stock Option Plan for Non-Employee Directors (1)
<PAGE>
Exhibit
-------
10.16 1998 Non-Employee Directors' Stock Option Plan (4)
10.17 License Agreement between the Company and The Penn State
Research Foundation dated December 13, 1993 (1)
10.18 Technical Consultancy Agreement between the Company and
William D. McElroy dated July 12, 1994 (1)
10.19 Technical Consultancy Agreement between the Company and
William D. McElroy dated October 1, 1996 (3)
10.20 General Release and Settlement Agreement between the Company
and Lawrence W. Gray dated February 8, 1996 (1)
10.21 Line of Credit Loan Agreement between the Company and Cape
Cod Bank and Trust Company dated September 24, 1990, as
amended (1)
10.22 Commercial Mortgage Loan Extension and Modification
Agreement between the Company and Cape Cod Bank and Trust
Company, dated July 6, 1994 (1)
10.23 Credit Agreement between the Company and Cape Cod Bank and
Trust Company dated August 18, 1999.
10.24 License Agreement between the Company and Optikos
Corporation dated July 29, 1997 (3)
10.25 Hydrophone License Agreement between the Company and
Syntron, Inc. dated December 5, 1996 (6)
10.26 Amendment Number 1 to Hydrophone License Agreement between
the Company and Syntron, Inc. dated September 11, 1998 (6)
10.27 Asset Purchase Agreement among Benthos, Inc., Datasonics,
Inc., and William L. Dalton and David A. Porta (7)
21 Subsidiaries of the Registrant (1)
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
<PAGE>
(1) Previously filed as an exhibit to Registrant's Registration
Statement on Form 10-SB filed with the Commission on December 17, 1996
(File No. O-29024) and incorporated herein by this reference.
(2) Previously filed as an exhibit to Registrant's Quarterly Report on
Form 10-QSB for the quarterly period ended March 30, 1997 (File No.
O-29024) and incorporated herein by this reference.
(3) Previously filed as an exhibit to Registrant's Quarterly Report on
Form 10-QSB for the quarterly period ended June 29, 1997 (File No. O-29024)
and incorporated herein by this reference.
(4) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended December 31, 1997
(File No. O-29024) and incorporated herein by this reference.
(5) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended March 31, 1998 (File
No. 0-29024) and incorporated herein by this reference.
(6) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended December 31, 1998
(File No. 0-29024) and incorporated herein by this reference.
(7) Previously filed as an exhibit to Registrant's Current Report on
Form 8-K filed on or about August 27, 1999 (File No. O-29024) and
incorporated herein by this reference.
<PAGE>
EXHIBIT 10.6
SECOND AMENDMENT TO
BENTHOS, INC. EMPLOYEE STOCK OWNERSHIP PLAN
as Amended and Restated Effective as of October 1, 1987
AMENDMENT adopted this 22/nd/ day of October 1997, by Benthos, Inc.
(hereinafter referred to as the "Company"):
WITNESSETH:
----------
WHEREAS, the Company has heretofore adopted a defined contribution
plan known as the "Benthos, Inc. Employee Stock Ownership Plan", which was
amended and restated effective as of July 1, 1987 (the "Plan") and
WHEREAS the Company previously amended said amended and restated Plan
to make a technical modification to the provisions pertaining to the limit on
"annual additions;" and
WHEREAS, the Company, pursuant to Section 16.1 of the Plan, has
reserved the right to amend the Plan at any time by vote of its Board of
Directors; and
WHEREAS, the Company wishes to amend further the Plan to permit
distributions to Participants or their Beneficiaries as soon as practicable
following retirement, death or other termination of employment.
NOW, THEREFORE, effective as of October 1, 1996, unless otherwise
specified, the Plan is hereby amended as follows:
1. Section 8.1(a) is amended to read as follows:
(a) Upon a Participant's attaining his Normal Retirement
Age, or upon his becoming a Disabled Participant, he shall become
entitled to the total value of his Account. The amount to which
the Participant is entitled shall be paid as provided in this
Article VIII in the form specified in Section 8.2 as soon as
practicable following his Normal Retirement Date, or if later,
his actual retirement date, but in no event shall commence later
than the earlier of (i) 60 days after the end of the Plan Year in
which he retires, unless the Participant elects to defer the
payment of his benefit pursuant to subsection (b) or (ii) his
Required Distribution Date. Any additional amounts to which a
retired or Disabled Participant who has received a distribution
shall become entitled (for example, as a result of an additional
Company contribution or allocation or forfeiture) shall be paid
to him as soon as practicable following the end of the Plan Year
in which such distribution was made.
-1-
<PAGE>
2. The reference in Section 9.3(a) to "Section 12.7" is hereby changed to
"Section 12.5."
3. The first sentence of Section 9.3(c) is amended to read as follows:
The amount to which the Beneficiary is entitled shall be
available for distribution to the Beneficiary as soon as practicable
following the death of the Participant.
4. Section 10.2(a) is deleted in its entirety and the following
substituted therefor:
(a) If the vested value of the Account of an Inactive
Participant whose employment terminated before attaining Normal
Retirement Age does not exceed $3,500 ($5,000 for Plan Years
beginning on or after October 1, 1997), the Administrative Committee
shall direct the Trustee to distribute the vested value to such
Participant in a lump sum in whole Shares with fractional Shares
paid in cash without the consent of the Participant. Subject to the
requirements of Section 12.5, this distribution shall be made as
soon as practicable following the termination of the Inactive
Participant's employment. If the vested value of the Account of an
Inactive Participant whose employment terminated before attaining
his Normal Retirement Age exceeds $3,500 ($5,000 for Plan Years
beginning on or after October 1, 1997) the individual may elect to
have the vested value paid to him or applied for his benefit in
accordance with the provisions of Article VIII as soon as
practicable following his termination of employment or at any time
thereafter. The vested value of an Inactive Participant's Account
shall be determined as of the Valuation Date immediately preceding
or coinciding with his Benefit Starting Date.
In all other respects of the terms of the Plan remain unchanged and in full
force and effect.
IN WITNESS WHEREOF, the undersigned Company has caused this Amendment to be
executed by its duly authorized officer as of the day and year set forth above.
BENTHOS, INC.
By: /s/ JOHN L. COUGHLIN
----------------------------
John L. Coughlin
-2-
<PAGE>
Exhibit 10.7
THIRD AMENDMENT TO
BENTHOS, INC. EMPLOYEE STOCK OWNERSHIP PLAN
as Amended and Restated Effective as of October 1, 1987
This AMENDMENT is adopted this 16th day of July 1999, by Benthos, Inc.
(hereinafter referred to as the "Company"):
WITNESSETH:
----------
WHEREAS, the Company has heretofore adopted a defined contribution plan
known as the "Benthos, Inc. Employee Stock Ownership Plan", which was amended
and restated effective as of October 1, 1987 and was further amended effective
October 1, 1996 (the "Plan"); and
WHEREAS, the Company, pursuant to Section 16.1 of the Plan, has reserved
the right to amend the Plan at any time by vote of its Board of Directors; and
WHEREAS, the Company wishes to amend further the Plan to change the first
paragraph of the definition of "Compensation".
NOW, THEREFORE, effective as of October 1, 1998 the Plan is hereby amended
as follows:
The definition of "Compensation" set forth in ARTICLE II is amended by
deleting the first paragraph thereof and substituting the following therefor:
"Compensation" means all of an Employee's "wages" within the meaning of
Section 3401(a) of the Code in connection with income tax withholding at the
source, and all other compensation paid to the Employee by the Company in the
course of its trade or business, for which the Company is required to furnish
the Employee with a written statement under Sections 6041(d), 6051(a)(3) and
6052 of the Code, determined without regard to exclusions based on the nature or
location of the employment or the services performed (such as the exception for
agricultural labor in Section 3401(a)(2) of the Code). Compensation shall
include only amounts actually paid to the Employee during the Plan Year, except
that (1) Compensation shall exclude bonuses, commissions, and compensation for
services of a type customarily performed by outside contractors (but shall
include overtime pay); and (2) in an Employee's initial year of participation in
the Plan, Compensation shall include only amounts actually paid to the Employee
from the Employee's effective date of participation pursuant to Section 3.1 to
the end of the Plan Year, or, if earlier, to the date on which the Employee
ceases to be a Participant. In addition, Compensation shall include any amount
which is contributed to an employee benefit plan for the Employee by the Company
pursuant to a salary reduction agreement, and which is not otherwise includible
in the gross income of the Employee under Section 125, 402(e)(3), 402(h)(B),
SARSEP or 403(b) of the Code.
<PAGE>
In all other respects the terms of the Plan remain unchanged and in full
force and effect.
IN WITNESS WHEREOF, the Company has caused this Third Amendment to be
executed in the name of and on behalf of the Company by its duly authorized
officer as of the day and year set forth above.
BENTHOS, INC.
By: /s/ JOHN L. COUGHLIN
---------------------
Title: President and CEO
<PAGE>
EXHIBIT 10.9
PUTNAM FLEXIBLE 401(K) AND PROFIT SHARING PLAN
PLAN AGREEMENT #001
This is the Plan Agreement for a Putnam nonstandardized prototype 401(k) plan
with optional profit sharing plan provisions. Please consult a tax or legal
advisor and review the entire form before you sign it. If you fail to fill out
this Putnam Plan Agreement properly, the Plan may be disqualified. By executing
this Plan Agreement, the Employer establishes a 401(k) and profit sharing plan
and trust upon the terms and conditions of Putnam Basic Plan Document #07, as
supplemented and modified by the provisions elected by the Employer in this Plan
Agreement. This Plan Agreement must be accepted by Putnam in order for the
Employer to receive future amendments to the Putnam Flexible 401(k) and Profit
Sharing Plan.
* * * * *
1. Employer Information. The Employer adopting this Plan is:
--------------------
A. Employer Name: Benthos, Inc.
-------------- -------------
B. Employer Identification Number: 04-2381876
------------------------------- ----------
C. Employer Address: 49 Edgerton Drive
----------------- -----------------
N. Falmouth, MA 02556
---------------------
D. SIC Code: 3815
--------- ----
E. Employer Contact: Name: Kathryn Busa -- Human Resources
----------------- -------------------------------------
Frank Dunne -- CFO
------------------
Phone #: 508-563-1000
------------
F. Fiscal Year: October 1 through September 30
------------ --------- ------------
(month/day) (month/day)
G. Type of Entity (check one):
---------------------------
[X] Corporation [ ] Partnership [ ] Subchapter S Corporation
[ ] Sole proprietorship [ ] Other _____
H. Plan Name: Benthos, Inc. 401(k) Retirement Plan
--------- ------------------------------------
I. Plan Number: 002 (complete)
----------- -
<PAGE>
2. Plan Information.
----------------
A. Plan Year. Check one:
---------
[ ] (1) The Calendar Year
[X] (2) The Plan Year will be the same as the Fiscal Year of the
Employer shown in 1.F. above. If the Fiscal Year of the
Employer changes, the Plan Year will change accordingly.
[ ] (3) The Plan Year will be the period of 12 months beginning on
the first day of ___________ (month) and ending on the
last day of________ (month).
[ ] (4) A short Plan Year commencing on ____________ (month/day/year)
and ending on ____________ (month/day/year) and immediately
thereafter the 12-consecutive month period commencing on
_____________ (month/day).
The Plan Year will also be your Plan's Limitation Year for purposes of
the contribution limitation rules in Article 6 of the Plan.
B. Effective Date of Adoption of Plan.
(1) Are you adopting this Plan to replace an existing plan?
[X] (a) Yes [ ] (b) No
(2) If you answered Yes in 2.B(1) above, the Effective Date of your
-------------------
adoption of this Replacement Plan will be the first day of the
current Plan Year unless you elect a later date in (2)(b) below.
Please complete the following:
(a) July 1,1987
-----------
Original Effective Date of the Plan you are Replacing
(b) July 1,1999
-----------
Effective Date of this Replacement Plan
(3) If you answered No in 2B(1) above, the Effective Date of your
------------------
adoption of this Plan will be the day you select below (not
before the first day of the current Plan Year, and not before the
day your Business began):
(a) The Effective Date is: ______________
month/day/year
2
<PAGE>
C. Identifying Highly Compensated Employees. Check either (1) or (2).
[X] (1) The Plan will use the regular method under Plan Section
2.58(a) for identifying Highly Compensated Employees.
If you selected this option and your Plan Year is the
calendar year, do you wish to make the regular method's
"calendar year election" for identifying your Highly
Compensated Employees?
[ ] (a) Yes [ ] (b) No
[ ] (2) The Plan will use the simplified method under Plan
Section 2.58(b) for identifying Highly Compensated
Employees.
3. Eligibility for Plan Participation (Plan Section 3.1). Employees will be
------------------------------------------------------
eligible to participate in the Plan when they complete the requirements you
select in A, B, C and D below.
A. Classes of Eligible Employees. The Plan will cover all employees who
-----------------------------
have met the age and service requirements with the following
exclusions:
[ ] (1) No exclusions. All job classifications will be eligible.
[X] (2) The Plan will exclude employees in a unit of Employees
covered by a collective bargaining agreement with respect to
which retirement benefits were the subject of good faith
bargaining, with the exception of the following collective
bargaining units, which will be included: ____.
[X] (3) The Plan will exclude employees who are non-resident aliens
without U.S. source income.
[ ] (4) Employees of the following Affiliated Employers (specify):
-------
-------
[X] (5) Leased Employees
[X] (6) Employees in the following other classes (specify):
commission salespeople
----------------------
temporary employees
-------------------
3
<PAGE>
B. Age Requirement (check and complete (1) or (2)):
---------------
[ ] (1) No minimum age required for participation
[X] (2) Employees must reach age 19 (not over 21) to participate
--
C. Service Requirements.
---------------------
(1) Elective Deferrals. To become eligible, an employee must complete
------------------
(choose one):
[X] (a) No minimum service required.
[ ] (b) One 6-month Eligibility Period
[ ] (c) One _____-month Eligibility Period (must be less than 12)
[ ] (d) One 12-month Eligibility Period
(2) Employer Matching Contributions: To become eligible, an employee
-------------------------------
must complete (choose one):
[ ] (a) No minimum service required.
[ ] (b) One 6-month Eligibility Period
[ ] (c) One _____-month Eligibility Period (must be less than 12)
[X] (d) One 12-month Eligibility Period
[ ] (e) Two 12-month Eligibility Periods (may only be chosen if
you adopt the vesting schedule under item 9.A(3)(a) to
provide 100% full and immediate vesting of Employer
Matching Contributions).
[ ] (f) Not applicable. The Employer will not make Employer
Matching Contributions.
(3) Profit Sharing Contributions. To become eligible, an employee
-----------------------------
must complete (choose one):
[ ] (a) No minimum service required.
[ ] (b) One 6-month Eligibility Period
[ ] (c) One _____-month Eligibility Period (must be less than 12)
[X] (d) One 12-month Eligibility Period
4
<PAGE>
[ ] (e) Two 12-month Eligibility Periods (may only be chosen
if you adopt the vesting schedule under item 9.A(3)(a) to
provide for 100% full and immediate vesting of Profit
Sharing Contributions)
[ ] (f) Not applicable. The Employer will not make Profit
Sharing Contributions.
(4) If the Employer acquired a business on or before the Effective
Date of this Plan and the Eligibility Periods selected in (1),
(2) and (3) for former employees of that acquired business will
include the former employees' periods of employment with that
business, list the business below. Any acquired business which
had a plan which the Employer now maintains must be listed below.
--------
--------
(5) If the Employer acquires a business after the Effective Date, the
Eligibility Periods for an employee of the acquired business will
be the periods selected in (1), (2) and (3) beginning on (check
(a) or (b)):
[ ] (a) the date the employee began work with the acquired
business.
[X] (b) the date of the acquisition (i.e., the date the employee
begins work for the Employer).
(6) Hours of Service for Eligibility Periods.
----------------------------------------
(a) 6-Month Eligibility Period. To receive credit for a 6-month
Eligibility Period, an employee must complete 6 months of
service, during which he completes at least:
[ ] (i) 500 Hours of Service
[ ] (ii) _____ Hours of Service (under 500)
(b) 12-Month Eligibility Period. To receive credit for a 12-
---------------------------
month Eligibility Period, an employee must complete 12
months of service, during which he completes at least:
[X] (i) 1,000 Hours of Service
[ ] (ii) _____ Hours of Service (under 1,000)
5
<PAGE>
(c) Other Eligibility Period. To receive credit for the
------------------------
Eligibility Period selected in 3.C(1)(c), 3.C(2)(c) and/or
3.C(3)(c) above, an employee must complete during it at
least:
[ ] (i) _____ Hours of Service (under 1000)
(7) Method of Crediting Hours of Service For Eligibility and Vesting.
----------------------------------------------------------------
Hours of Service will be credited to an employee by the following
method (check one):
[X] (a) Actual hours for which an employee is paid
[ ] (b) Any employee who has one actual paid hour in the
following period will be credited with the number of Hours
of Service indicated (check one):
[ ] (i) Day (10 Hours of Service)
[ ] (ii) Week (45 Hours of Service)
[ ] (iii) Semi-monthly payroll period (95 Hours of Service)
[ ] (iv) Month (190 Hours of Service)
(8) Entry Dates. Each employee in an eligible class who completes the
-----------
age and service requirements specified above will begin to
participate in the Plan on (check one):
[ ] (a) The first day of the month in which he fulfills the
requirements.
[X] (b) The first of the following dates occurring after he
fulfills the requirements (check one):
[ ] (i) The first day of the month following the date he
fulfills the requirements (monthly).
[X] (ii) The first day of the first, fourth, seventh and
tenth months in a Plan Year (quarterly).
[ ] (iii) The first day of the first month and the seventh
month in a Plan Year (semiannually).
[ ] (c) Other: _____ (May be no later than (i) the first day of
the Plan Year after which he fulfills the requirements, and
(ii) the date six months after the date on which he fulfills
the requirements, which ever occurs first.)
6
<PAGE>
D. (For New Plans Only) Will all eligible Employees as of the Effective Date
be required to meet the age and service requirements for participation
specified in B and C above?
[ ] (a) Yes
[ ] (b) No. Eligible Employees will be eligible to become Participants
as of the Effective Date even if they have not satisfied (check one
or both):
[ ] (i) the age requirement.
[ ] (ii) the service requirement.
4. Contributions.
-------------
A. Elective Deferrals (Plan Section 5.2). Your Plan will allow employees
-------------------------------------
to elect pre-tax contributions under Section 401(k) of the Code. You
must complete this part A.
(1) A Participant may make Elective Deferrals for each year in an
amount not to exceed (check one):
[X] (a) 15% of his Earnings
--
[ ] (b) _____% of his Earnings not to exceed $_____ (specify a
dollar amount)
[ ] (c) $_____ (specify a dollar amount)
(2) Will a Participant be required to make a minimum Elective
Deferral in order to make Elective Deferrals under the Plan?
(check one and complete as applicable)
[X] (a) No.
[ ] (b) Yes. The minimum Elective Deferral will be ____% of the
Participant's Earnings.
(3) A Participant may begin to make Elective Deferrals, or change the
amount of his Elective Deferrals, as of the following dates
(check one):
[ ] (a) First business day of each month (monthly).
[X] (b) First business day of the first, fourth, seventh and
tenth months of the Plan Year (quarterly).
[ ] (c) First business day of the first and seventh months of
the Plan Year (semiannually).
[ ] (d) First business day of the Plan Year only (annually).
[ ] (e) Other: ______
7
<PAGE>
(4) Will Participants be permitted to make separate Elective
Deferrals of bonuses, even if bonuses have otherwise been
excluded from Compensation for the purpose of Elective Deferrals
under 7.A(l)?
[ ] (a) Yes [X] (b) No
B. Employer Matching Contributions. (Plan Section 5.8). Complete this
-------------------------------
part B only if you will make Employer Matching Contributions under the
Plan.
(1) The Employer will contribute and will allocate to each Qualified
Participant's Employee Matching Account an Employer Matching
Contribution on the basis set forth below:
[X] (a) Discretionary matching contributions. (The Employer may
select this option in addition to option (b) if the
Employer wishes to have the option to make discretionary
matching contributions in addition to fixed matching
contributions.)
[ ] (b) Fixed matching contributions.
[ ] (i) based on Elective Deferrals:
[ ] (A) _____% of Elective Deferrals
[ ] (B) _____% of Elective Deferrals up to
_____% of Earnings.
[ ] (C) _____% of Elective Deferrals up to
_____% of Earnings and _____% of Elective
Deferrals over that percentage of Earnings
and up to _____% of Earnings. (The third
percentage number must be less than the
first percentage number.)
[ ] (D) _____% of Elective Deferrals up to
$_______ of Elective Deferrals.
[ ] (E) _____% of Elective Deferrals up to
$_______ of Elective Deferrals and ___% of
Elective Deferrals over that dollar
amount and up to $______ of Elective
Deferrals. (The last percentage must be
less than the first percentage).
8
<PAGE>
[ ] (ii) based on after-tax Participant Contributions:
[ ] (A) _____% of Participant Contributions
[ ] (B) _____% of Participant Contributions up
to _____% of Earnings.
[ ] (C) _____% of Participant Contributions up
to _____% of Earnings and _____% of
Participant Contributions over that
percentage of Earnings and up to ______ % of
Participant Contributions. (The third
percentage must be less than the first
percentage)
[ ] (D) _____% of Participant Contributions up
to $_____ of Participant Contributions.
[ ] (E) _____% of Participant Contributions up
to $_____ of Participant Contributions and
_____% of Participant Contributions over that
dollar amount and up to $_____ of Participant
Contributions. (The last percentage must be
less than the first percentage).
(2) Qualified Participant. In order to receive an allocation of
---------------------
Employer Matching Contributions for a Plan Year, an Employee must
be a Qualified Participant for that purpose. Select below either
(a) alone, or any combination of (b), (c) and (d).
[ ] (a) To be a Qualified Participant eligible to receive
Employer Matching Contributions for a Plan Year,
an Employee must (check (i) or (ii)):
[ ] (i) Either be employed on the last day of
the Plan Year, complete more than 500 Hours
of Service in the Plan Year, or retire, die
or become disabled in the Plan Year.
[ ] (ii) Either be employed on the last day of
the Plan Year or complete more than 500
Hours of Service in the Plan Year.
Stop here if you checked (a). If you did not check (a), check
(b), (c) or (d), or any combination of (b), (c) and (d).
9
<PAGE>
To be a Qualified Participant eligible to receive Employer
Matching Contributions for a Plan Year, an Employee must:
[X] (b) Be credited with 1 (choose 1, 501 or 1,000) Hours of
-
Service in the Plan Year.
[ ] (c) Be an Employee on the last day of the Plan Year.
[X] (d) Retire, die or become disabled during the Plan Year.
(3) Will the Employer have the option of making all or any portion of
its Employer Matching Contributions in Employer Stock?
[ ] (a) Yes [X] (b) No
C. Profit Sharing Contributions. (Plan Sections 4.1 and 4.2)
----------------------------
(1) Profit Limitation. Will Profit Sharing Contributions to the Plan
-----------------
be limited to the current and accumulated profits of your
Business? Check one:
[ ] (a) Yes [X] (b) No
(2) Amount. The Employer will contribute to the Plan for each Plan
------
Year (check one):
[X] (a) An amount chosen by the Employer from year to year
[ ] (b) _____% of the Earnings of all Qualified Participants
for the Plan Year
[ ] (c) $_____ for each Qualified Participant per_____ (enter
time period, e.g. payroll period, plan year)
(3) Allocations to Participants
---------------------------
(a) Allocation to Participants. Profit Sharing Contributions
--------------------------
will be allocated:
[X] (i) Pro rata (percentage based on compensation)
[ ] (ii) Uniform Dollar amount
[ ] (iii) Integrated With Social Security (complete (b) and
(c) below)
(b) Integration with Social Security. (Complete only if you have
--------------------------------
elected in 4.C(3)(a) to integrate your Plan with Social
Security.) Profit Sharing Contributions will be allocated to
Qualified Participants as you check below:
10
<PAGE>
[ ] (i) Profit Sharing Contributions will be allocated
according to the Top-Heavy Integration Formula in Plan
Section 4.2(c)(l) in every Plan Year, whether or not
the Plan is top-heavy.
[ ] (ii) Profit Sharing Contributions will be allocated
according to the Top-Heavy Integration Formula in Plan
Section 4.2(c)(1) only in Plan Years in which the Plan
is top-heavy. In all other Plan Years, contributions
will be allocated according to the Non-Top-Heavy
Integration Formula in Plan Section 4.2(c)(2).
(c) Integration Level. (Complete only if you have elected in
------------------
4.C(3)(a) to integrate your Plan with Social Security.) The
Integration Level will be (check one):
[ ] (i) The Social Security Wage Base in effect at the
beginning of the Plan Year.
[ ] (ii) _____% (not more than 100%) of the Social
Security Wage Base in effect at the beginning of the
Plan Year.
[ ] (iii) $_____ (not more than the Social Security Wage
Base).
Note: The Social Security Wage Base is indexed annually to
----
reflect increases in the cost of living.
(4) Qualified Participants. In order to receive an allocation of
----------------------
Profit Sharing Contributions for a Plan Year, an Employee must be
a Qualified Participant for this purpose. Select below either (a)
alone, or any combination of (b), (c) and (d).
[ ] (a) To be a Qualified Participant eligible to receive
an allocation of Profit Sharing Contributions for a Plan
Year, an Employee must (check (i) or (ii)):
[ ] (i) Either be employed on the last day of the Plan
Year, complete more than 500 Hours of Service in
the Plan Year, or retire, die or become disabled
in the Plan Year.
[ ] (ii) Either be employed on the last day of the Plan
Year or complete more than 500 Hours of Service
in the Plan Year.
Stop here if you checked (a). If you did not check (a), check
(b), (c) or (d), or any combination of (b), (c) and (d).
11
<PAGE>
To be a Qualified Participant eligible to receive an allocation
of Profit Sharing Contributions for a Plan Year, an Employee
must:
[X] (b) Be credited with 1,000 (choose 1, 501 or 1,000)
-----
Hours of Service in the Plan Year.
[X] (c) Be an Employee on the last day of the Plan Year.
[X] (d) Retire, die or become disabled during the Plan Year.
D. Participant Contributions (Plan Section 4.6). Will your Plan allow
-------------------------------------------
Participants to make after-tax contributions?
[ ] (1) Yes [X] (2) No
E. Qualified Matching Contributions (Plan Section 2.61). Skip this part E
----------------------------------------------------
if you will not make Qualified Matching Contributions. N/A
(1) Qualified Matching Contributions will be made with respect to
(check one):
[ ] (a) Elective Deferrals made by all Qualified Participants
(as defined in 4.B(2))
[ ] (b) Elective Deferrals made only by Qualified Participants
(as defined in 4.B(2)) who are not Highly Compensated
Participants
(2) The amount of Qualified Matching Contributions made with respect
to a Participant will be:
[ ] (a) discretionary
[ ] (b) fixed (check and complete (i), (ii) or (iii))
[ ] (i) _____% of Elective Deferrals
[ ] (ii) _____% of Elective Deferrals that do not
exceed _____% of Earnings
[ ] (iii) _____% of Elective Deferrals that do not
exceed $________.
12
<PAGE>
F. Qualified Nonelective Contributions (Plan Section 2.62): Skip this
-------------------------------------------------------
part F if you will not make Qualified Nonelective Contributions. N/A
(1) Qualified Nonelective Contributions will be made on behalf of
(check either (a) or (b) and either (c) or (d)):
[ ] (a) All Participants
[ ] (b) Only Participants who are not Highly Compensated
Employees who also, for the Plan Year for which the
Qualified Nonelective Contributions are made
[ ] (c) Are Qualified Participants (as defined in 4.C(4))
[ ] (d) Made Elective Deferrals
(2) The amount of Qualified Nonelective Contributions for a Plan Year
will be (check one):
[ ] (a) _____% (not over 15%) of the Earnings of
Participants on whose behalf Qualified Nonelective
Contributions are made
[ ] (b) An amount determined by the Employer from year to
year, to be shared in proportion to their Earnings by
Participants on whose behalf Qualified Nonelective
Contributions are made
G. Forfeitures
(1) Employer Matching Contributions. Forfeitures of Employer Matching
-------------------------------
Contributions will be used as follows (check and complete (a) or
(b)):
[ ] (a) Applied to reduce the following contributions required
of the Employer (check (i) and/or (ii)):
[ ] (i) Employer Matching Contributions
[ ] (ii) Profit Sharing Contributions
[X] (b) Reallocated as follows (check (i) or (ii)):
[X] (i) As additional Employer Matching Contributions
[ ] (ii) As additional Profit Sharing Contributions
13
<PAGE>
(2) Profit Sharing Contributions. Forfeitures of Profit Sharing
Contributions will be used as follows (check (a) or (b)):
[ ] (a) Applied to reduce the following contributions
required of the Employer (check (i) and/or (ii)):
[ ] (i) Profit Sharing Contributions
[ ] (ii) Employer Matching Contributions
[X] (b) Reallocated as additional Profit Sharing Contributions
5. Top-Heavy Minimum Contributions (Plan Section 14.3). Skip paragraphs A and
---------------------------------------------------
B below if you do not maintain any other qualified plan in addition to this
Plan.
A. For any Plan Year in which the Plan is Top-Heavy, the Top-Heavy
minimum contribution (or benefit) for Non-Key employees participating
both in this Plan and another qualified plan maintained by the
Employer will be provided in (check one):
[ ] (1) This Plan [ ] (2) The other qualified plan
B. If you maintain a defined benefit plan in addition to this Plan, and
the Top-Heavy Ratio (as defined in Plan Section 14.2(c)) for the
combined plans is between 60% and 90%, you may elect to provide an
increased minimum allocation or benefit pursuant to Plan Section 14.4.
Specify your election by completing the statement below:
The Employer will provide an increased (specify contribution or
benefit)_____ in its (specify defined contribution or defined
benefit)_____ plan as permitted under Plan Section 14.4.
6. Other Plans. You must complete this section if you maintain or ever
-----------
maintained another qualified plan in which any Participant in this Plan is
(or was) a participant or could become a participant. The Plan and your
other plan(s) combined will meet the contribution limitation rules in
Article 6 of the Plan as you specify below:
A. If a Participant in the Plan is covered under another qualified
defined contribution plan maintained by your Business, other than a
master or prototype plan (check one):
[ ] (1) The provisions of Section 6.2 of the Plan will apply
as if the other plan were a master or prototype plan.
[ ] (2) The plans will limit total annual additions to the
maximum permissible amount, and will properly reduce any
excess amounts, in the manner you describe below.
---------
---------
14
<PAGE>
B. If a Participant in the Plan is or has ever been a participant in a
defined benefit plan maintained by your Business, the plans will meet
the limits of Article 6 in the manner you describe below:
---------
If your Business has ever maintained a defined benefit plan, state
below the interest rate and mortality table to be used in establishing
the present value of any benefit under the defined benefit plan for
purposes of computing the top-heavy ratio:
Interest rate: ______%
Mortality Table: ______
7. Compensation (Plan Section 2.8).
-------------------------------
A. Amount.
------
(1) Elective Deferrals and Employer Matching Contributions.
------------------------------------------------------
Compensation for the purposes of determining the amount and
allocation of Elective Deferrals and Employer Matching
Contributions will be determined as follows (choose either (a) or
(b), and (c) and/or (d) as applicable).
[X] (a) Compensation will include Form W-2 earnings as
defined in Section 2.8 of the Plan.
[ ] (b) Compensation will include all compensation
included in the definition of Code Section 415
Compensation in Plan Section 6.5(b) of the Plan.
[X] (c) In addition to the amount provided in either (a) or
(b) above, Compensation will also include any amounts
withheld from the employee under a 401(k) plan,
cafeteria plan, SARSEP, tax sheltered 403(b)
arrangement, or Code Section 457 deferred compensation
plan, and contributions described in Code Section 41
4(h)(2) that are picked up by a governmental employer.
[X] (d) Compensation will also exclude the following amount
(choose each that applies):
[X] (i) overtime pay.
[ ] (ii) bonuses.
[X] (iii) commissions.
[X] (iv) other pay (describe): services of a type
------------------
customarily performed by outside contractors
--------------------------------------------
[ ] (v) compensation in excess of $ ______
15
<PAGE>
(2) Profit Sharing Contributions. Compensation for the purposes
----------------------------
of determining the amount and allocation of Profit Sharing
Contributions shall be determined as follows (choose either
(a) or (b), and (c) and/or (d), as applicable).
[X] (a) Compensation will include Form W-2 earnings as
defined in Section 2.8 of the Plan.
[ ] (b) Compensation will include all compensation included
in the definition of Code Section 415 Compensation
in Section 6.5(b) of the Plan.
[X] (c) In addition to the amount provided in either (a)
or (b) above, compensation will also include any
amounts withheld from the employee under a 401(k)
plan, cafeteria plan, SARSEP, tax sheltered 403(b)
arrangement, or Code Section 457 deferred
compensation plan, and contributions described in
Code Section 414(h)(2) that are picked up by a
governmental employer.
[X] (d) Compensation will also exclude the following
amounts (choose each that applies):
[ ] (i) overtime pay
[X] (ii) bonuses
[X] (iii) commissions
[X] (iv) other pay (describe): services of a
type customarily performed by outside
contractors
[ ] (v) compensation in excess of $ ______
Note: No exclusion under (d) may be selected if
Profit Sharing Contributions will be integrated
with Social Security under 4.C(3)(a)(iii). In
addition, no exclusion under (d) will apply for
purposes of determining the top-heavy minimum
contribution if the Plan is top-heavy.
B. Measuring Period. Compensation will be based on the Plan Year.
----------------
However, for an Employee's initial year of participation in the Plan,
Compensation will be recognized as of:
[ ] (1) the first day of the Plan Year.
[X] (2) the date the Participant enters the Plan.
16
<PAGE>
8. Distributions and Withdrawals.
A. Retirement Distributions.
------------------------
(1) Normal Retirement Age (Plan Section 7.1). Normal retirement age
----------------------------------------
will be the later of 59 1/2 (not over age 65) or _____ (not more
------
than 5) years of participation in the Plan.
(2) Early Retirement (Plan Section 7.1). Select one:
-----------------------------------
[X] (a) No early retirement will be permitted.
[ ] (b) Early retirement will be permitted at age ______ .
[ ] (c) Early retirement will be permitted at age ______
with at least ____ __ Years of Service.
(3) Annuities (Plan Section 9.3). Will your Plan permit distributions
---------------------------
in the form of a life annuity? You must check Yes if this Plan
replaces or serves as a transferee plan for an existing Plan that
permits distributions in a life annuity form.
[ ] (a) Yes [X] (b) No
B. Hardship Distributions (Plan Section 12.2). Will your Plan permit
hardship distributions?
[ ] (1) No
[X] (2) Yes. Indicate below from which Accounts hardship
withdrawals will be permitted (check all that apply):
[X] (a) Elective Deferral Account
[X] (b) Rollover Account
[ ] (c) Employer Matching Account
[ ] (d) Employer Contribution Account (i.e. Profit Sharing
Contributions)
C. Withdrawals after Age 59 1/2 (Plan Section 12.3). Will your Plan
------------------------------------------------
permit employees over age 59 1/2 to withdraw amounts upon request? You
must check Yes if this Plan replaces an existing Plan that permits
withdrawals after age 59 1/2.
[X] (1) Yes [ ] (2) No
17
<PAGE>
D. Withdrawals following Five Years of Participation or Two Years after
--------------------------------------------------------------------
Contribution (Plan Section 12.4). Will your Plan permit employees to
--------------------------------
withdraw amounts from the vested portion of their Employer Matching
Contribution Accounts and Employer Contribution Accounts (i.e., Profit
Sharing Contributions) if either (i) the Participant has been a
Participant for at least five years, or (ii) the amount withdrawn from
each of these Accounts is limited to the amounts that were credited to
that Account prior to the date two years before the withdrawal? You
must check yes if this Plan replaces a Plan which permits withdrawals
in these circumstances.
[ ] (1) Yes [X] (2) No
E. Loans (Plan Section 12.5). Will your Plan permit loans to employees
-------------------------
from the vested portion of their Accounts?
[ ] (1) No
[X] (2) Yes. Indicate below whether loans will be permitted for any
reason or only on account of hardship:
[X] (a) Any reason.
[ ] (b) Hardship only.
F. Automatic Distribution of Small Accounts (Plan Section 9.1). Will your
-----------------------------------------------------------
Plan automatically distribute vested account balances not exceeding
$3,500, within 60 days after the end of the Plan Year in which a
Participant separates from employment?
[X] (1) Yes [ ] (2) No
9. Vesting (Plan Article 8)
------------------------
A. Time of Vesting (select (1) or (2) below and complete vesting
-------------------------------------------------------------
schedule).
---------
[X] (1) Single Vesting Schedule:
The vesting schedule selected below will apply to both Employer
Matching Contributions and Profit Sharing Contributions.
[ ] (2) Dual Vesting Schedules:
The vesting schedule marked with an "MC" below will apply to
Employer Matching Contributions and the vesting schedule marked
with a "PS" below will apply to Profit Sharing Contributions.
18
<PAGE>
(3) Vesting Schedules:
<TABLE>
<CAPTION>
[ ] (a) 100% vesting immediately upon participation in the Plan.
[X] (b) Five-Year Graded Schedule:
<S> <C> <C> <C> <C> <C>
Vested Percentage 20% 40% 60% 80% 100%
Years of Service 1 2 3 4 5
[ ] (c) Seven-Year Graded Schedule:
Vested Percentage 20% 40% 60% 80% 100%
Years of Service 3 4 5 6 7
[ ] (d) Six-Year Graded Schedule:
Vested Percentage 20% 40% 60% 80% 100%
Years of Service 2 3 4 5 6
[ ] (e) Three-Year Cliff Schedule:
Vested Percentage 0% 100%
Years of Service 0-2 3
[ ] (f) Five-Year Cliff Schedule:
Vested Percentage 0% 100%
Years of Service 0-4 5
[ ] (g) Other Schedule (must be at least as favorable as Seven-Year Graded
Schedule or Five-Year Cliff Schedule):
</TABLE>
(i) Vested Percentage _____% _____% _____% _____% _____%
(ii) Years of Service ______ ______ ______ ______ ______
(4) Top Heavy Schedule:
(a) If you selected above an "Other Schedule," specify in the
space below the schedule that will apply in Plan Years that
the Plan is top-heavy. The schedule you specify must be at
least as favorable to employees, at all years of service, as
either the Six-Year Graded Schedule or the Three-Year Cliff
Schedule. The top-heavy vesting schedule will be:
19
<PAGE>
[ ] (i) the same "Other Schedule" selected above
[ ] (ii) the following schedule:
Vested Percentage _____% _____% _____% _____% _____%
Years of Service _____ _____ ______ _____ _____
[ ] (iii) Six-Year Graded Schedule
[ ] (iv) Three-Year Cliff Schedule
(b) If the Plan becomes top-heavy in a Plan Year, will the top-
heavy vesting schedule apply for all subsequent Plan Years?
N/A
[ ] (i) Yes [ ] (ii) No
B. Service for Vesting (select (1) or (2), and complete (3)).
---------------------------------------------------------
[X] (1) All of an employee's service will be used to determine his Years
of Service for purposes of vesting
[ ] (2) An employee's Years of Service for vesting will include all years
except (check all that apply):
[ ] (a) (New plan) service before the effective date of the plan
[ ] (b) (Existing plan) service before the effective date of the
existing plan
[ ] (c) Service before the Plan Year in which an employee reached age
18
(3) Will an employee's service for a business acquired by the
Employer that was performed before the acquisition be included in
determining an employee's Years of Service for vesting?
[ ] (a) Yes [X] (b) No
List below any business acquired on or before the Effective Date
for which an employee's service will be included in determining
an employee's Years of Service for vesting. Service of an
employee for a predecessor employer (which includes an acquired
business) whose plan the Employer maintains must be included as
service for the Employer under this Plan. Therefore, also list
below any predecessor employer whose plan the Employer maintains:
--------
--------
--------
20
<PAGE>
C. Hours of Service for Vesting. The number of Hours of Service required
----------------------------
for crediting a Year of Service for vesting will be (check one):
[X] (1) 1,000 Hours of Service
[ ] (2) _____ Hours of Service
(under 1,000)
Hours of Service for vesting will be credited according to the method
selected under 3.C(6).
D. Year of Service Measuring Period for Vesting (Plan Section 2.52). The
----------------------------------------------------------------
periods of 12 months used for measuring Years of Service will be
(check one):
[X] (1) Plan Years
[ ] (2) 12-month Eligibility Periods
Note: If you are adopting this Plan to replace an existing plan, employees
will be credited under this Plan with all service credited to them under
the plan you are replacing.
10. Investments (Plan Sections 13.2 and 13.3).
-----------------------------------------
A. Available Investment Products (Plan Section 13.2). The investment
-------------------------------------------------
options available under the Plan are identified in the Service
Agreement or such other written instructions between the Employer and
Putnam, as the case may be. All Investment Products must be sponsored,
underwritten, managed or expressly agreed to in writing by Putnam. If
there is any amount in the Trust Fund for which no instructions or
unclear instructions are delivered, it will be invested in the default
option selected by the Employer in its Service Agreement with Putnam,
or such other written instructions as the case may be, until
instructions are received in good order, and the Employer will be
deemed to have selected the option indicated in its Service Agreement,
or such other written instructions as the case may be, as an available
Investment Product for that purpose.
B. Instructions (Plan Section 13.3). Investment instructions for amounts
--------------------------------
held under the Plan generally will be given by each Participant for
his own Accounts and delivered to Putnam as indicated in the Service
Agreement between Putnam and the Employer. Check below only if the
Employer will make investment decisions under the Plan with respect to
the following contributions made to the Plan. (Check all applicable
options.)
C.
[ ] (1) The Employer will make all investment decisions with respect
to all employee contributions, including Elective Deferrals,
Participant Contributions, Deductible Employee Contributions
and Rollover Contributions.
21
<PAGE>
[ ] (2) The Employer will make all investment decisions with respect
to all Employer contributions, including Profit Sharing
Contributions, Employer Matching Contributions, Qualified
Matching Contributions and Qualified Nonelective
Contributions.
[ ] (3) The Employer will make investment decisions with respect to
Employer Matching Contributions and Qualified Matching
Contributions.
[ ] (4) The Employer will make investment decisions with respect to
Qualified Nonelective Contributions.
[ ] (5) The Employer will make investment decisions with respect to
Profit Sharing Contributions.
[ ] (6) Other (Describe. An Employer may elect to make investment
decisions with respect to a specified portion of a specific
type of contribution to the Plan.): ______
_______
_______
C. Changes. Investment instructions may be changed (check one):
-------
[X] (1) on any Valuation Date (daily)
[ ] (2) on the first day of any month (monthly)
[ ] (3) on the first day of the first, fourth, seventh and tenth
months in a Plan Year (quarterly)
D. Employer Stock. (Skip this paragraph if you did not designate Employer
--------------
Stock as an investment under the Service Agreement.)
(1) Voting. Employer Stock will be voted as follows:
------
[ ] (a) In accordance with the Employer's instructions.
[ ] (b) In accordance with the Participant's instructions.
Participants are hereby appointed named fiduciaries for
the purpose of the voting of Employer Stock in
accordance with Plan Section 13.8.
(2) Tendering. Employer Stock will be tendered as follows:
---------
[ ] (a) In accordance with the Employer's instructions.
[ ] (b) In accordance with the Participant's instructions.
Participants are hereby appointed named fiduciaries for
the purpose of the tendering of Employer Stock in
accordance with Plan Section 13.8.
22
<PAGE>
11. Administration.
--------------
A. Plan Administrator (Plan Section 15.1). You may appoint a person or a
--------------------------------------
committee to serve as Plan Administrator. If you do not appoint a Plan
Administrator, the Plan provides that the Employer will be the Plan
Administrator.
The initial Plan Administrator will be (check one):
[ ] This person: _____
[X] A committee composed of these people:
Kathryn Busa
------------
Francis E. Dunne, Jr.
---------------------
John L. Coughlin
----------------
B. Recordkeeper (Plan Section 15.4). Unless Putnam expressly permits
--------------------------------
otherwise, you must appoint Putnam as Recordkeeper to perform certain
routine services determined upon execution of a written Service
Agreement between Putnam and the Employer. The initial Record keeper
will be:
Putnam Fiduciary Trust Company
------------------------------
Putnam Retail 401(k) B-2-B
--------------------------
859 Willard St.
---------------
Quincy, MA 02269-9110
---------------------
12. Determination Letter Required. You may not rely on an opinion letter issued
-----------------------------
to Putnam by the National Office of the Internal Revenue Service as
evidence that the Plan is qualified under Section 401 of the Internal
Revenue Code. In order to obtain reliance with respect to qualification of
the Plan, you must receive a determination letter from the appropriate Key
District Office of Internal Revenue. Putnam will prepare an application for
such a letter upon your request at a fee agreed upon by the parties.
Putnam will inform you of all amendments it makes to the prototype plan. If
Putnam ever discontinues or abandons the prototype plan, Putnam will inform
you. This Plan Agreement #001 may be used only in conjunction with Putnam's
Basic Plan Document #07.
* * * * *
If you have any questions regarding this Plan Agreement, contact Putnam at:
Putnam Defined Contribution Plans
One Putnam Place B2B
859 Willard Street
Quincy, MA 02269
Phone: 1-800-752-5766
23
<PAGE>
* * * * *
EMPLOYER'S ADOPTION OF PUTNAM
FLEXIBLE 401(k) AND PROFIT SHARING PLAN
The Employer named below hereby adopts a PUTNAM FLEXIBLE 401(k) AND PROFIT
SHARING PLAN, and appoints Putnam Fiduciary Trust Company to serve as Trustee of
------------------------------
the Plan. The Employer acknowledges that it has received copies of the current
prospectus for each Investment Product available under the Plan, and represents
that it will deliver copies of the then current prospectus for each such
Investment Product to each Participant before each occasion on which the
Participant makes an investment instruction as to his Account. The Employer
further acknowledges that the Plan will be acknowledged by Putnam as a Putnam
Flexible 401(k) and Profit Sharing Plan only upon Putnam's acceptance of this
Plan Agreement.
Investment Options
- ------------------
The Employer hereby elects the following as the investment options available
under the Plan:
Putnam Money Market Fund -- A Putnam Income Fund -- A
----------------------------- -----------------------
Putnam Growth & Income Fund II -- A Putnam International Growth Fund -- A
----------------------------------- -------------------------------------
Putnam Investors Fund -- A Putnam Vista Fund -- A
-------------------------- ----------------------
The following investment option shall be the default option: Putnam Money Market
-------------------
Fund -- A (select the default option from among the investment options listed
- ---------
above).
Benthos, Inc.
Employer signature(s) to adopt Plan: Date of signature:
/s/ John L. Coughlin 5/12/99
- ----------------------------- --------------------
/s/ Francis E. Dunne, Jr. 5/12/99
- ----------------------------- --------------------
/s/ Kathryn Busa 5/12/99
- ----------------------------- --------------------
Please print name(s) of authorized person(s) signing above:
John L. Coughlin, President & CEO
- ----------------------------------------
Francis E. Dunne, Jr., Treasurer
- ----------------------------------------
Kathryn Busa, Human Resources Manager
- ----------------------------------------
A new Plan must be signed by the last day of the Plan Year in which the Plan is
to be effective.
24
<PAGE>
* * * * *
ACCEPTANCE OF PUTNAM FIDUCIARY TRUST COMPANY AS TRUSTEE
The Trustee accepts appointment in accordance with the terms and conditions of
the Plan, effective as of the date of execution by the Employer set forth above.
Putnam Fiduciary Trust Company, Trustee
By: /s/ James Brockelman
----------------------------------------------
25
<PAGE>
* * * * *
ACCEPTANCE BY PUTNAM
Putnam hereby accepts this Employer's Plan as a prototype established under
Putnam Basic Plan Document #07.
Putnam Mutual Funds Corp.
By: /s/ Paulette C. Amisano
----------------------------------------------
26
<PAGE>
7 Shattuck Road
Andover, Massachusetts 01810
PUTNAM INVESTMENTS
FIRST AMENDMENT TO THE
BENTHOS, INC. 401(k) RETIREMENT PLAN
Benthos, Inc. (the "Employer") having heretofore adopted the Benthos, Inc.
401(k) Retirement Plan, a prototype plan document consisting of the Plan
Agreement #001 and the Putnam Basic Plan Document #07 (the "Plan") effective as
of July 1, 1999, pursuant to the power reserved to the Employer in Section 17.1
of the Plan, hereby amends the Plan Agreement as set forth below.
1. Subsection D. of Section 9., of the Plan Agreement is hereby amended
effective July 1, 1999, by striking said subsection in its entirety and by
substituting the following new paragraph in lieu thereof:
"D. Year of Service Measuring Period for Vesting (Plan Section 2.52). The
----------------------------------------------------------------
periods of 12 months used for measuring Years of Service will be
(check one):
[ ] (1) Plan Years
[X] (2) 12-month Eligibility Periods
Note: If you are adopting this Plan to replace an existing plan,
employees will be credited under this Plan with all service credited to
them under the plan you are replacing."
In all other respects, the Plan provisions remain in full force and effect.
IN WITNESS, WHEREOF, the Employer has caused the First Amendment to the Plan
to be duly executed in its name and behalf and its corporate seal to be
affixed as of the date signed below.
ATTEST:
Benthos, Inc. Putnam Fiduciary Trust Company
By: /s/ F.E. Dunne, Jr. By: /s/ Tina Campbell
-------------------- --------------------
Title: Treasurer Title: VP Compliance & Consulting
-------------------- -----------------------------
Date: 9/28/99 Date: 10/1/99
-------------------- --------------------
BOSTON . LONDON . TOKYO
27
<PAGE>
EXHIBIT 10.23
CREDIT AGREEMENT
This CREDIT AGREEMENT, dated as of August 18, 1999, is made by and between
Benthos, Inc. (the "Borrower"), a Massachusetts corporation with its principal
place of business at 49 Edgerton Drive, North Falmouth, Massachusetts 02556, and
Cape Cod Bank and Trust Company (the "Lender"), a Massachusetts banking
corporation, with a place of business at 2 Barlows Landing Road, Pocasset,
Massachusetts, 02559.
WHEREAS, the Borrower has entered into and intends to consummate an
acquisition agreement to purchase all of the tangible and intangible assets used
or useful in the business of Datasonics, Inc. for a purchase price of $6,650,000
(subject to certain adjustments).
WHEREAS, the Borrower has requested that the Lender extend a revolving
credit loan facility and a term loan facility to the Borrower to provide
acquisition and working capital financing as provided herein.
WHEREAS, the Lender is willing to extend the foregoing credit facilities to
the Borrower, provided that the Borrower agrees to the following terms and
conditions.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Borrower and the Lender agree
as follows:
ARTICLE I
CERTAIN DEFINITIONS AND ACCOUNTING TERMS
Section 1.01. Defined Terms. As used in this Agreement or in any
-------------
certificate or opinion delivered in connection with this Agreement, the
following terms shall have the following meanings:
"Acquisition" shall mean the acquisition of substantially all of the assets
of Datasonics, Inc. by the Borrower pursuant to the Acquisition Documents.
"Acquisition Documents" shall mean Asset Purchase Agreement Among Benthos,
Inc., as the Buyer, Datasonics, Inc., as the Seller, and William Dalton and
David W. Porta, as the Stockholders, dated as of August __, 1999, and all
exhibits, annexes and schedules in connection therewith, as such documents may
be amended or modified in accordance with the terms thereof, and all related
agreements, consents, leases, instruments, certificates, opinions and other
documents.
"Agreement" shall mean this Credit Agreement, as the same may be amended
from time to time.
<PAGE>
"Annually Adjusted Prime Rate Loan" shall mean any advance hereunder which
shall bear interest at an annually adjusted rate per annum equal to the Prime
Rate minus one quarter of one percent (.25%), with a change in such rate of
interest to become effective on the anniversary of the execution of this
Agreement.
"Borrower" shall mean Benthos, Inc.
"Business Day" shall mean any day which is not a Saturday, Sunday or a
legal holiday on which banks in Boston, Massachusetts are open for business.
"Capital Expenditures" shall mean all acquisitions of machinery, equipment,
land, leaseholds, buildings, leasehold improvements and all other expenditures
for purposes which are considered to be fixed assets under GAAP consistently
applied. Where a fixed asset is acquired by a lease which is required to be
capitalized pursuant to Statement of Financial Accounting Standards No. 13 or
any successor thereto, the amount required to be capitalized pursuant thereto
shall be considered to be an expenditure in the year such asset is first leased.
"Cash Flow" shall mean, for any period, the Borrower's Net Income (or Net
Loss) for such period, plus each of the following items, without duplication:
(i) all interest on any Indebtedness paid or accrued during such period and
actually deducted on the books of the Borrower for the purposes of computation
of such Net Income (or Net Loss) for the period involved, (ii) 75% of the amount
of the provision for depreciation actually deducted on the books of the Borrower
for the purposes of the computation of such Net Income (or Net Loss) for the
period involved, and (iii) the amount of the provision for amortization actually
deducted on the books of the Borrower for the purposes of the computation of Net
Income (or Net Loss) for the period involved.
"Charter" shall mean the Articles of Organization or other organizational
document of a corporation referred to, in each case as amended to date.
"Collateral" shall mean all that property of the Borrower described in any
of the Security Instruments, including but not limited to all Receivables,
Inventory, machinery, equipment and general intangibles of the Borrower.
"Current Assets" shall mean all assets of any corporation or other entity
which would, in accordance with GAAP, be classified as current assets of an
entity conducting a business the same as, or similar to, that of such entity;
excluding, however, (i) assets which have been pledged, assigned, mortgaged,
hypothecated or otherwise encumbered to secure any Indebtedness which is not
included in Current Liabilities and (ii) any and all amounts due from affiliated
entities.
"Current Liabilities" shall mean all liabilities of any corporation or other
entity which would, in accordance with GAAP, be classified as current
liabilities of an entity conducting a business the
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same as, or similar to, that of such entity, including, without limitation, all
capitalized lease payments and other payments under capitalized leases and fixed
prepayments of, and sinking fund payments with respect to, Indebtedness required
to be made within one year from the date of determination, plus all Indebtedness
in respect of Revolving Loans without regard to the date of maturity of any such
Revolving Loans.
"Debt Service Payments" shall mean, for any period, all interest on any
Indebtedness paid or accruing during such period actually deducted on the books
of the Borrower for the purposes of the computation of Net Income (or Net Loss)
plus the current maturity of principal for the year.
"EBIT" shall mean, for any period, the Net Income (or Net Loss) of the
Borrower for such period, plus each of the following without duplication: (i)
all interest on any Indebtedness paid or accruing during such period and
actually deducted on the books of the Borrower for the purposes of computation
of such Net Income (or Net Loss) for the period involved, and (ii) all federal
and state income taxes (but not ad valorem property taxes, sales taxes or taxes
----------
in the nature of an excise tax) provided for in the financial statement of the
Borrower with respect to such period, and.
"EBITDA" shall mean for any period, the Net Income (or Net Loss) of the
Borrower for such period, plus each of the following items, without duplication:
(i) all interest on any Indebtedness paid or accrued during such period and
actually deducted on the books of the Borrower for the purposes of the
computation of such Net Income (or Net Loss) for the period involved, (ii) all
federal and state income taxes (but not ad valorem property taxes, sales taxes
----------
or taxes in the nature of an excise tax) provided for in the financial statement
of the Borrower with respect to such period and deducted on the books of the
Borrower for the purposes of the computation of such Net Income (or Net Loss)
for the period involved, and (iii) the amount of the provision for depreciation
and/or amortization actually deducted on the books of the Borrower for the
purposes of the computation of such Net Income (or Net Loss) for the period
involved.
"Event of Default" shall mean any of the events specified in Section 11.01
hereof.
"Expiration Date" shall mean January 31, 2000.
"Federal Claim" shall mean any Receivable consisting of a claim within the
meaning of, and subject to (for purposes of protecting or perfecting the rights
of an assignee), the Assignment of Claims Act of 1940, as amended and in effect
from time to time.
"Federal Home Loan Bank Rate" shall mean the interest rate identified by
the Federal Home Loan Bank of Boson as the Classic Credit Rate from time to
time.
"Fiscal Year" shall mean the fiscal year of the Borrower which shall end on
each September 30.
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"Fixed Rate Loan" shall mean any advance hereunder which shall bear
interest at a rate per annum equal to the Federal Home Loan Bank Rate plus two
and one quarter percent (2.25%), which rate shall be fixed for a period of 3, 5
or 7 years at the election of the Borrower at the time of the advance or
conversion to a Fixed Rate Loan.
"Fully Variable Prime Rate Loan" shall mean any advance hereunder which
shall bear interest at a fluctuating rate per annum which shall at all times be
equal to the Prime Rate minus one quarter of one percent (.25%), with a change
in such rate of interest to become effective on the same day on which any change
in the Prime Rate is effective.
"GAAP" shall mean United States generally accepted accounting principles as
defined by controlling pronouncements of the Financial Accounting Standards
Board, as from time to time supplemented and amended.
"Indebtedness" shall mean the total of all obligations of a Person, whether
current or long-term, which in accordance with GAAP would be included as
liabilities upon such Person's balance sheet at the date as of which
Indebtedness is to be determined, and shall also include guaranties,
endorsements (other than for collection in the ordinary course of business) or
other arrangements whereby responsibility is assumed for the obligations of
others, whether by agreement to purchase or otherwise acquire the obligations of
others, including any agreement, contingent or otherwise, to furnish funds
through the purchase of goods, supplies or services for the purpose of payment
of the obligations of others.
"Inventory" shall mean all goods now owned or hereafter acquired by the
Borrower and intended for sale, all raw materials, parts, work-in-process,
finished goods, and all materials and supplies which are used or which may be
used in manufacturing, selling, packing, shipping, advertising or furnishing of
goods, whether now owned or hereafter acquired or created and wherever located,
as well as all proceeds (including, without limitation, insurance proceeds) and
products of any of the foregoing.
"Net Income" (or "Net Loss") shall mean the net income (or net loss,
expressed as a negative number) of a Person for any period, after deductions for
all taxes actually paid or accrued and all expenses and other charges,
determined in accordance with GAAP consistently applied.
"Notice of Borrowing" shall mean a notice delivered in accordance with
Section [_____] hereof.
"Notes" shall mean the Revolving Note and the Term Note collectively.
"Patent Assignment Agreement: shall mean the Patent Assignment Agreement of
the borrower in the form of Exhibit ___ attached hereto.
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"Person" shall mean an individual, corporation, partnership, joint venture,
trust or unincorporated organization, or a government or any agency or political
subdivision thereof.
"Premises" shall mean all locations in which the Borrower owns, leases or
operates any plant, sales office, executive or administrative office, warehouse
or other facility or maintains any Inventory, all of which are listed on Exhibit
B hereto.
"Prime Rate" shall mean that rate of interest per annum announced by the
Wall Street Journal or other comparable publication from time to time as the
prime rate.
"Principal Office" shall mean the principal place of business of the
Lender, now located at 2 Barlows Landing Road, Pocasset, Massachusetts 02559.
"Receivables" shall mean all of the Borrower's accounts and accounts
receivable, and all of the Borrower's rights to payment for goods sold or leased
or services performed by the Borrower, whether now in existence or arising from
time to time hereafter, including, without limitation, rights evidenced by an
account, note, contract, security agreement, chattel paper, or other evidence of
indebtedness or security, together with (i) all security pledged, assigned,
hypothecated or granted to or held by the Borrower to secure the foregoing, (ii)
general intangibles arising out of the Borrower's rights in any goods, the sale
of which gave rise thereto, (iii) all guarantees, endorsements and
indemnifications on, or of, any of the foregoing, (iv) all powers of attorney
for the execution of any evidence of indebtedness or security or other writing
in connection therewith, and (v) all evidences of the filing of financing
statements and other statements and the registration of other instruments in
connection therewith and amendments thereto, notices to other creditors or
secured parties, and certificates from filing or other registration officers.
"Revolving Commitment" shall mean the obligation of the Lender to make
Revolving Loans pursuant to Article II.
"Revolving Commitment Amount" shall mean $2,000,000.
"Revolving Loans" shall mean the loans made by the Lender pursuant to
Article II.
"Revolving Note" shall mean the promissory note of the Borrower in the form
of Exhibit A attached hereto.
"Security Agreement" shall mean that certain Security Agreement of even
date herewith between the Borrower and the Lender.
"Security Instruments" shall mean (i) the Security Agreement, (ii) the
Trademark Assignment Agreement, (iii) the Patent Assignment Agreement, and (iv)
the Mortgage and Security Agreement and Financing Statement.
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"Subsidiary" shall mean any corporation or other entity of which the
Borrower and/or any of its subsidiaries, directly or indirectly, owns, or has
the right to control or direct the voting of, fifty (50%) percent or more of the
outstanding capital stock or other ownership interest having general voting
power (under ordinary circumstances).
"Tangible Net Worth" shall mean an amount equal to the total assets of any
Person minus the total liabilities of such Person minus (i) the total intangible
assets of such Person and (ii) any amounts due to such Person from any related
entity. Total intangible assets shall be deemed to include, but shall not be
limited to, goodwill, the excess of cost over book value of acquired businesses
accounted for by the purchase method, formulae, trademarks, non-competition
covenants, trade names, patents, patent rights and deferred expenses (including,
but not limited to, unamortized debt discount and expense, organizational
expense and experimental and development expenses).
"Term Loan" shall mean the loan made by the Lender pursuant to Article III.
"Term Note" shall mean the promissory note of the Borrower in the form of
Exhibit B attached hereto.
"Total Debt" shall mean, for any period, the aggregate amount of
Indebtedness owed by Borrower, including, but not limited to all amounts
outstanding under this Agreement (including all fees and costs outstanding
regardless of whether such amounts are currently due and payable).
"Total Interest Expense" shall mean, for any period, the aggregate amount
of interest required by GAAP to be expensed by the Borrower during such period
on all Indebtedness outstanding during all or any part of such period, whether
such interest is required to be reflected as an item of expense or capitalized.
"Trademark Assignment Agreement" shall mean the Trademark Assignment
Agreement of the Borrower in the form of Exhibit L attached hereto.
Section 1.02. Use of Defined Terms. Any defined term used in the plural
--------------------
preceded by the definite article shall include all members of the relevant
class. Any defined term used in the singular preceded by "any" shall include any
number of the members of the relevant class.
Section 1.03. Accounting Terms. All accounting terms not specifically
----------------
defined herein shall be construed in accordance with GAAP consistently applied
on the basis used by the concerned entity in prior years.
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ARTICLE II
REVOLVING LOANS
Section 2.01. Revolving Loans. Subject to the terms and conditions
---------------
hereinafter set forth, the Lender will make loans ("Revolving Loans") under this
Article II to the Borrower at the Principal Office of the Lender on any Business
Day prior to the first to occur of (i) the Expiration Date or (ii) the earlier
termination of the Revolving Commitment pursuant to the express terms of this
Agreement, in such amounts as the Borrower may request; provided, however, that
-------- -------
the aggregate outstanding balance due pursuant to the Revolving Loans shall at
no time exceed the Revolving Commitment Amount. Each Revolving Loan shall be a
Fully Variable Prime Rate Loan. The Borrower may obtain Revolving Loans, repay
Revolving Loans and obtain Revolving Loans again on one or more occasions. The
Revolving Loan shall mature as of the Expiration Date, but may be renewed by the
Lender, in its sole discretion, on a year-to-year basis thereafter subject to
satisfactory review of the Borrower's financial condition and compliance with
the Borrower's then current underwriting criteria.
Section 2.02. Revolving Note. The Revolving Loans shall be evidenced by the
--------------
Revolving Note of the Borrower, dated as of the date hereof, payable to the
order of the Lender. The Borrower hereby irrevocably authorizes the Lender to
make or cause to be made, on a schedule attached to the Revolving Note or on the
books of the Lender, at or following the time of the making of each Revolving
Loan and at the time of receiving any payment of principal thereon, an
appropriate notation reflecting such transaction and the then aggregate unpaid
principal balance of the Revolving Loans. The amount so noted shall constitute
presumptive evidence as to the amount owed by the Borrower with respect to the
principal amount of the Revolving Loans. Failure of the Lender to make any such
notation shall not, however, affect any obligation of the Borrower or any right
of the Lender hereunder or under the Revolving Note.
Section 2.03. Requests for Revolving Loans. The Borrower shall give notice
----------------------------
(a "Notice of Borrowing") to the Lender by 1:30 p.m. (Boston, Massachusetts
time) on the proposed date of funding such Revolving Loan. Each Notice of
Borrowing shall be given to the Lender in writing in substantially the form of
Exhibit attached hereto, specifying (a) the requested date of funding such
- -------------
Revolving Loan (which shall be a Business Day) and (b) the amount of such
Revolving Loan. The Borrower agrees to indemnify and hold the Lender harmless
for any action or inaction, including the making of Revolving Loans hereunder,
or losses or expenses, taken or incurred by the Lender in good faith reliance
upon such Notice of Borrowing.
Section 2.04. Interest Payments. (a) The Borrower will pay interest on the
-----------------
principal amount of each Revolving Loan outstanding from time to time, from the
date of the initial Revolving Loan until payment of all Revolving Loans in full,
such interest to be payable (i) monthly in arrears on the first day of each
month, commencing with the first day of the first month after the initial
Revolving
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Loan and (ii) on the date of any voluntary or mandatory repayment of all or a
portion of any Revolving Loan. The rate of interest so payable shall be a
fluctuating rate per annum which shall at all times be equal to the sum of the
Prime Rate minus one quarter of one percent (0.25%), but, in no event, in excess
of the maximum rate then permitted by applicable law, with a change in such rate
of interest to become effective on the same day on which any change in the Prime
Rate is effective.
(b) Interest payable under the Revolving Loans shall be computed on the
basis of a year of 360 days for the number of days actually elapsed.
(c) Overdue principal and, to the extent permitted by law, interest shall
bear interest at a fluctuating rate per annum which at all times shall be equal
to the Prime Rate plus [four percent (4%)] (but in no event in excess of the
maximum rate permitted by then applicable law), payable on demand.
Section 2.05. Mandatory Repayment. The Borrower shall repay in full the
-------------------
principal balance of all Revolving Loans and all interest thereon upon the first
to occur of: (i) the Expiration Date, or (ii) an acceleration under Subsection
11.02(a) following an Event of Default.
Section 2.06. Voluntary Repayment. The Borrower may prepay, at any time,
-------------------
the whole or any portion of the principal balance of the Revolving Loans without
premium or penalty. Each such prepayment shall be accompanied by (i) the payment
of the full amount of interest accrued but unpaid to the date of such prepayment
for each Revolving Loan being prepaid in whole or in part, and (ii) if such
prepayment is less than the aggregate outstanding balance of all of the
Revolving Loans, the principal amount of such prepayment shall be Twenty Five
Thousand Dollars ($25,000) or an integral multiple thereof.
ARTICLE III
TERM LOAN
3.01 Term Loan. Subject to the terms and conditions hereof, Lender hereby
---------
agrees to make a term loan (the "Term Loan") to the Borrower in the principal
---------
amount of Five Million Five Hundred Thousand Dollars ($5,500,000), the proceeds
of which loan shall be used to fund the Acquisition. On or before the Closing
Date, the Borrower shall elect whether the Term Loan will be (a) a Fully
Variable Prime Rate Loan, (b) an Annually Adjusted Prime Rate Loan or (c) a
Fixed Rate Loan. If the Borrower elects to have the Term Loan be classified as
either a Fully Variable Prime Rate Loan or an Annually Adjusted Prime Rate Loan,
the Borrower may elect to convert the Term Loan to a Fixed Rate Loan at any
time, prior to the Term Loan Expiration Date or the occurrence of an Event of
Default.
Section 3.02. Term Note. The Term Loan shall be evidenced by the Term Note
---------
of the
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<PAGE>
Borrower in the form of Exhibit [ ] hereto, dated as of the date hereof, payable
-----------
to the order of the Lender.
Section 3.03. Interest.
--------
(a) The Borrower shall pay interest on the principal amount of
the Term Loan outstanding from time to time, from the date hereof until payment
of the Term Loan in full, such interest to be payable (i) monthly in arrears on
the first day of each month, commencing with the first day of the first month
after the date hereof, (ii) on the date of any voluntary or mandatory repayment
of all or a portion of the Term Loan. The Term Loan shall bear interest as set
forth in the Term Note.
(b) Interest payable on the Term Loan shall be computed on the
basis of a year of 360 days for the number of days actually elapsed.
(c) Overdue principal and, to the extent permitted by law,
interest owing on the Term Loan shall bear interest at a fluctuating rate per
annum which at all times shall be equal to the Prime Rate plus [four percent
(4%)] (but in no event in excess of the maximum rate permitted by then
applicable law), payable on demand.
Section 3.04. Amortization of Term Loan.
-------------------------
(a) The Borrower shall repay the Term Loan on the first date of
each month beginning on September 1, 1999 (or, if such date is not a Business
Day, on the immediately preceding Business Day) in eighty-four (84) monthly
payments, the first eighty-three of which payments shall be in the amount of
$65,475.19, plus such interest as is payable pursuant to Section 3.03(a) hereof,
and the eighty-fourth of which payment shall be due on the Term Loan Expiration
Date and shall be in the full amount of the principal then outstanding under the
Term Loan, plus such interest as is payable pursuant to Section 3.03(a) hereof.
Section 3.05. Prepayment of Term Loan. Except as hereinafter provided,
-----------------------
Borrower shall have the right to prepay Term Loan incurred by it in whole or in
part from time to time without premium or penalty in multiples of Twenty Five
Thousand Dollars ($25,000) only. The foregoing notwithstanding, to the extent
that the Term Loan is a Fixed Rate Loan, there will be a prepayment fee
associated with any prepayment, whether in whole or in part, if on the date of
such prepayment, the Federal Home Loan Rate for the period of time nearest to
the remaining period of maturity of the Loan (the "Comparison Rate") is less
than the Federal Home Loan Rate at the time of conversion to a Fixed Rate Loan
(the "Base Rate"), the prepayment will be the difference between the Base Rate
and the Comparison Rate times the prepayment amount, times the remaining period
to the maturity of the Term Loan.
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ARTICLE IV
LOAN PROCEEDS, PAYMENTS AND OTHER GENERAL PROVISIONS
Section 4.01. Availability. The proceeds of the Term Loan and all Revolving
------------
Loans shall be credited by the Lender to a general deposit account at the Lender
standing in the name of the Borrower.
Section 4.02. Charges Against Accounts. The Lender may charge any general
------------------------
deposit account of the Borrower at the Lender (or any affiliate of the Lender)
with the amount of all payments of interest, principal and other sums due, from
time to time, under this Agreement and/or the Notes; and will thereafter notify
the Borrower of the amount so charged. The failure of the Lender so to charge
any account or to give any such notice shall not affect the obligation of the
Borrower to pay interest, principal or other sums as provided herein or in the
Notes.
Section 4.03. Use of Loan Proceeds. The proceeds of each Revolving Loan
--------------------
will be used by the Borrower solely for the general corporate purposes of the
Borrower. The proceeds of the Term Loan shall be used solely to fund the
Acquisition and for payment of any related fees and expenses.
Section 4.04. Payments; Late Payment Fees; Application of Payments. All
----------------------------------------------------
payments of interest, principal and any other sums payable hereunder and/or
under the Notes shall be made to the Lender at its Principal Office, in
immediately available funds. All payments received by the Lender after 1:00 p.m.
on any day shall be deemed received as of the next succeeding Business Day. A
late fee of five percent (5%) will be charged on any payment required to be made
pursuant to this Agreement which is not received by the Lender on or before ten
(10) days after the date such payment is due. All monies received by the Lender
hereunder shall be applied first to fees, charges, costs and expenses payable to
the Lender under this Agreement, next to interest then accrued on account of the
Revolving Loans, next to interest then accrued on account of the Term Loan, next
to the principal balance of the Revolving Loans, and last to the principal
balance of the Term Loan.
Section 4.05. Payment on Non-Business Days. Whenever any payment to be made
----------------------------
to the Lender hereunder or under the Notes shall be stated to be due on a day
which is not a Business Day, such payment may be made on the next succeeding
Business Day, and interest payable on each such date shall include the amount
thereof which shall accrue during the period of such extension of time.
Section 4.06. Notice of Prepayments. Notice of any prepayment of principal
---------------------
to be made by the Borrower to the Lender pursuant to any provision of this
Credit Agreement, whether such prepayment is voluntary or involuntary, shall be
delivered to the Lender by 12:00 noon on the Business Day immediately preceding
the date of such prepayment. Such notice shall specify the principal amount to
be repaid.
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Section 4.07. Facility Fees.
-------------
(a) The Borrower shall pay to the Lender at closing a facility fee
with respect to the Revolving Loans equal to Two Thousand Dollars ($2,000.00)
annually, which amount shall be prorated based on the actual number of calendar
months from the Closing Date until the Expiration Date.
(b) The Borrower shall also pay to the Lender at closing, a facility
fee with respect to the Term Loan equal to Five Thousand Dollars ($5,000.00).
(c) Any fees provided for in this Section 4.07 are in addition to any
fees, balances or charges which may be applicable to other services now or
hereafter provided to the Borrower by the Lender or any of its affiliates.
ARTICLE V
YIELD PROTECTION AND ILLEGALITY
Section 5.01 Yield Protection. If any law or any governmental rule,
----------------
regulation, policy, guideline or directive (whether or not having the force of
law), or any interpretation thereof, or the compliance by the Lender with any of
the foregoing,
(a) subjects the Lender to any tax, duty, charge or withholding on or
from payments due from the Borrower (excluding taxation of the overall net
income of the Lender), or changes the basis of taxation of payments to the
Lender in respect of the Revolving Loans; or
(b) imposes, or increases, or deems applicable any reserve,
assessment, insurance charge, special deposit or similar requirement
against assets of, deposits with, or credit extended by, the Lender; or
(c) imposes any other condition, the result of which is to increase
the cost to the Lender of making, funding or maintaining the Loans, or
reduces any amount receivable by the Lender in connection with the Loans,
or requires the Lender to make any payment calculated by reference to the
amount of the Loans held or interest received on the Loans; or
(d) affects the amount of capital required or expected to be
maintained by the Lender or any corporation controlling the Lender, and the
Lender determines the amount of capital required is increased by, or based
upon, the existence of this Credit Agreement or its obligation to make the
Loans hereunder or of commitments of this type;
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<PAGE>
then, upon notice to the Borrower in accordance with Section 14.03 hereof, the
Borrower shall pay to the Lender that portion of such increased expense incurred
(including, in the case of the preceding clause (d), any reduction in the rate
of return on capital to an amount below that which the Lender could have
achieved but for such change in regulation, after taking into account the
Lender's policies as to capital adequacy), or reduction in an amount received,
which the Lender determines is attributable to making, funding and maintaining
the Revolving Loans.
Section 5.02 Notice to Borrower If the Lender shall determine that it is
------------------
entitled to reimbursement pursuant to Section 5.01 hereof, the Lender shall give
notice thereof to the Borrower, whereupon the Borrower shall pay such amount to
the Lender within thirty (30) days of receipt of such notice. Such notice shall
set forth the nature of the occurrence giving rise to such compensation, the
additional amount or amounts to be paid to the Lender, and the method by which
such amounts were determined. Such notice shall be conclusive evidence of the
amount owed by the Borrower in the absence of manifest error. In determining
such amount, the Lender may use any reasonable averaging and attribution
methods. No failure on the part of the Lender to demand compensation on any one
occasion shall constitute a waiver of its right to demand such compensation on
any other occasion.
ARTICLE VI
CONDITIONS OF LENDING
Section 6.01. Conditions Precedent to Initial Loan. Prior to the initial
------------------------------------
Revolving Loan and the Term Loan hereunder, the Borrower shall deliver to the
Lender the following documents, in form and substance satisfactory to the Lender
and its counsel:
(a) This Agreement, the Revolving Note, the Term Note, the Security
Instruments, and all other agreements and documents which the Lender requests of
the Borrower, and which are incident thereto.
(b) Uniform Commercial Code Financing Statements, so-called landlord's
waivers, and all such other documents as shall be necessary or desirable to vest
in the Lender a perfected, first priority security interest in and to all of the
Collateral.
(c) A favorable written opinion of counsel to the Borrower, in the form of
Exhibit D attached hereto.
- ---------
(d) A copy of the Charter of the Borrower and all amendments thereto,
certified by the Secretary of State of the jurisdiction in which the Borrower is
incorporated; a copy of the By-laws of the Borrower, as amended to date, as
certified by its clerk or Secretary; certificates of legal existence and good
standing of the Borrower in the jurisdiction of its incorporation; and
certificates
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<PAGE>
of the appropriate government offices in Massachusetts, Texas and California,
attesting to its qualification and good standing in each such jurisdiction.
(e) Certified copies of the resolutions of the Board of Directors (and, if
necessary, stockholders) of the Borrower evidencing approval of this Agreement,
the Revolving Note, Term Note, the Security Instruments and the other matters
contemplated hereby and thereby, together with certified copies of all documents
evidencing other necessary corporate action or approvals, if any, with respect
to this Agreement, the Revolving Note, the Term Note, the Security Instruments
and such other matters, including, without limitation, any required approvals of
governmental authorities and other Persons.
(f) A certificate, signed by the Secretary or Clerk of the Borrower,
setting forth the names of the officers of the Borrower authorized to sign this
Agreement, the Revolving Note, the Term Note, the Security Instruments and any
and all certificates, notices and reports referred to herein or therein. Each
such certificate shall contain the true signatures of such officers, and the
Lender may conclusively rely on the statements made therein until the Lender
shall have received a further certificate of such Secretary or Clerk canceling
or amending the prior certificate and submitting signatures of the officers
named in such further certificate.
(g) Evidence of the consummation of the Acquisition.
(h) The policies or certificates of insurance required by this Agreement
or the Security Instruments, listing the Lender as additional insured and loss
payee.
(i) A certificate executed by the chief financial officer of the Borrower
affirming compliance with the provisions of Section 6.02(d) and Section 8.02.
(j) The Borrower's audited balance sheets, statements of income and
retained earnings and cash flows for the fiscal year ending as of September 30,
1998 and the Borrower's most recently filed Form 10-Qsb.
(k) Payment of all fees and expenses, including, without limitation,
facility fees and attorneys' fees and expenses, incurred by Lender in connection
with the preparation, negotiation and execution of this Agreement and all other
related documents.
(l) Such other documents, instruments, records, assignments, consents,
certificates, opinions, assurances and authorizations as the Lender shall
reasonably require.
Section 6.02. Conditions Precedent to All Loans. Any Loan (including the
---------------------------------
initial Loans) is subject to the further conditions precedent that on the date
on which such Revolving Loan is made and after giving effect thereto:
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<PAGE>
(a) The statements, representations and warranties made in this Agreement
shall continue to be correct as of the date of such Loan.
(b) The covenants and agreements of the Borrower contained herein shall
have been complied with on and as of the date of such Loan.
(c) No event which constitutes, or which, with notice or lapse of time, or
both, could constitute, an Event of Default shall have occurred and be
continuing.
(d) No material adverse change shall have occurred in the financial
condition of the Borrower from that disclosed in the Form 10-Qsb furnished to
the Lender pursuant to subsection 6.01(k).
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
As an inducement to the Lender to execute this Agreement and to make the
Loans hereunder to the Borrower, the Borrower hereby represents and warrants to
the Lender that:
Section 7.01 Due Incorporation, etc. The Borrower is a corporation duly
-----------------------
organized, validly existing and in good standing under the laws of the
Commonwealth of Massachusetts. The Borrower has the legal power and authority
to enter into and perform this Agreement, to execute and deliver the Notes, to
grant the security interests described in the Security Instruments, and to enter
into and perform all obligations required of the Borrower by all other
instruments and other documents referred to herein to which it is a party, and
to fulfill its obligations set forth herein and therein and to carry out the
transactions contemplated hereby and thereby. The Borrower has all requisite
corporate power to own and operate its properties and to carry on its business
as now conducted, and as proposed to be conducted and is duly qualified to do
business and in good standing in each of Massachusetts, Texas and California.
As of the date of this Agreement, the Borrower has no Subsidiaries other than
Benthos International, Inc., which is a foreign sales corporation organized
under the laws of the United States Virgin Islands. The Borrower is not a
member of any partnership or joint venture.
(b) The authorized capital stock of the Borrower consists of 7,500,000
shares of Common Stock, with a par value of $0.667, of which 1,360,927 shares
are issued and outstanding as of August 4, 1999. All of such issued and
outstanding shares have been duly and validly issued and are fully paid and
nonassessable. Except as set forth on Exhibit 7.01(b), there are no agreements
---------------
regarding issuance of rights, options, warrants, conversion rights or agreements
or commitments of any kind relating to the aforesaid shares or to the authorized
and unissued or treasury stock of the Borrower.
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(c) The execution, delivery and performance of this Agreement, the Notes,
the Security Instruments and the other documents required to be executed by the
Borrower pursuant hereto have been duly authorized by all necessary corporate
action, will not require the consent of any third party, and will not conflict
with, violate the provisions of, or cause a default or constitute an event
which, with the passage of time or giving of notice or both, could constitute an
Event of Default on the part of the Borrower under any contract, agreement, law,
rule, order, ordinance, franchise, instrument or other document or under any
provision of the Charter or By-laws of the Borrower, or will result in the
imposition of any lien or encumbrance on any property or assets of the Borrower,
other than the liens established by the Security Instruments. This Agreement and
the other documents delivered to the Lender by the Borrower pursuant hereto
(including, without limitation, the Notes) are the legal, valid and binding
obligations of the Borrower enforceable in accordance with their respective
terms.
(d) There are no actions, suits, proceedings or investigations pending or,
to the knowledge of the Borrower, threatened, anticipated or contemplated (nor,
to the knowledge of the Borrower, is there any basis therefor) against or
affecting the Borrower before any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, which could
prevent or hinder the consummation of the transactions contemplated hereby or
call into question the validity of this Agreement, the Notes, any of the
Security Instruments or any other instrument provided for or contemplated by
this Agreement or any action taken or to be taken in connection with the
transactions contemplated hereby or thereby or which in any single case or in
the aggregate might result in any material adverse change in the business,
prospects, condition, affairs or operation of the Borrower or any material
impairment of the right or ability of the Borrower to carry on its operations as
now conducted or proposed to be conducted, except as listed on Schedule 7.01(d).
(e) The Borrower is not in violation of any term of its Charter or By-
laws, as now in effect. The Borrower is not in violation of any term of any
mortgage, indenture or judgment, decree or order, or any other instrument,
contract or agreement applicable to it.
(f) The Borrower has filed proper and accurate federal, foreign, state and
local tax returns, reports and estimates for all years and periods for which any
such returns, reports or estimates were required to be filed and has paid all
taxes, assessments, impositions, fees and other governmental charges required to
be paid in respect of the periods covered by any such returns, reports or
estimates. There are in effect no waivers of applicable statutes of limitations
for federal, state or local taxes for any period. The Borrower is not delinquent
in the payment of any tax, assessment or governmental charge and the Borrower
has not requested any extension of time within which to file any tax return,
which return has not since been filed. No deficiencies for any tax, assessment
or governmental charge have been asserted or assessed, and the Borrower does not
know of any material liability or basis therefor.
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(g) The Borrower is in compliance with all requirements of federal, state
and local law and all requirements of all governmental bodies or agencies having
jurisdiction over it, the conduct of its business, the use of its properties and
assets, and all Premises occupied by it, and, without limiting the foregoing,
the Borrower has all the required franchises, licenses, permits, certificates
and authorizations needed for the conduct of its business and the use of its
properties and all Premises occupied by it, as now conducted, owned and used or
as proposed to be conducted, owned and used. The Borrower has not received any
notice, not heretofore complied with, from any federal, state or local authority
or any insurance or inspection body that any of its properties, facilities,
equipment or business procedures or practices fails to comply with any
applicable law, ordinance, regulation, building or zoning law or any other
requirement of any such authority or body. No authorization, consent, approval,
license, exemption of or filing or registration with any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, is or will be necessary for the valid execution or delivery of, or for
the performance by the Borrower of its obligations under this Agreement, the
Revolving Note or any other instrument provided for or contemplated by this
Agreement.
(h) The Borrower is not engaged in the business of extending credit for
the purpose of purchasing or carrying margin stock (within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System), and no
part of the proceeds of any Revolving Loans will be used to purchase or carry
any margin stock or to extend credit to others for the purpose of purchasing or
carrying any margin stock or in any other manner which would involve a violation
of any of the regulations of the Board of Governors of the Federal Reserve
System. The Borrower is primarily engaged in the business of designing,
manufacturing and marketing products used for sensing, measuring and inspecting
in harsh environments.
(i) The Borrower has good, clear record and marketable title in fee to
such of its fixed assets as are real property, and good and merchantable title
to all of its other assets now carried on its books, including those reflected
on the balance sheets of the Borrower referred to in Section [________] hereof
or acquired since the date of such balance sheets, free of any mortgages,
pledges, charges, liens, security interests or other encumbrances, except as
permitted under Section [____]. The Borrower enjoys peaceful and undisturbed
possession under all leases under which it is operating, and all said leases are
valid and subsisting and in full force and effect.
(j) The Borrower owns or has a valid right to use the patents, patent
rights or licenses, trademarks, trademark applications, trademark rights and
trade names or trade name rights or franchises now being used or necessary to
conduct its business, all of which are listed on Exhibit [ ] hereto, and, to the
-----------
best of the Borrower's knowledge, the conduct of its business as now operated
does not conflict with valid patents, patent rights or licenses, trademarks,
trademark rights and trade names and trade name rights or franchises of others
in any manner that could materially adversely affect in any manner the business
or assets or condition, financial or otherwise, of the Borrower.
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(k) The Borrower has not incurred any accumulated funding deficiency
within the meaning of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), nor has the Borrower incurred any liability to the Pension
Benefit Guaranty Corporation ("PBGC") established under ERISA (or any successor
thereto) in connection with any employee benefit plan (or other class of benefit
which the PBGC has elected to insure), and there have been no "reportable
events" or "prohibited transactions" with respect to any such plan, as those
terms are defined in Section 4043 of ERISA and Section 4975 of the Internal
Revenue Code of 1986, as amended, respectively. The Borrower has no pension
plans, profit-sharing plans or other employee benefit plans, except as described
on Exhibit [ ] hereto.
-----------
(l) The Borrower's principal place of business and chief executive office
is located at 49 Edgerton Drive, North Falmouth, Massachusetts 02556. Except as
described in Exhibit [ ] hereto, the Borrower maintains no records relating to
-----------
Collateral at any address other than its chief executive office, nor does the
Borrower maintain, store or keep any Inventory, machinery or equipment at any
location other than the Premises, except for certain demonstration equipment of
de minimis value that is held by employees of the Borrower for sales and
marketing purposes and certain basic office equipment located at 1125 Richmond
Avenue, Suite 104, Houston, Texas.
(m) None of the executive officers of the Borrower is subject to any
agreement in favor of any Person, other than the Borrower, which limits or
restricts the Borrower's right to engage in the type of business activity
conducted or proposed to be conducted by the Borrower or to use therein any
property or confidential information or which grants to any Person other than
the Borrower, any rights in any Collateral.
(n) The Borrower is not a party to any contract or agreement, the terms of
which now has or, as far as can be foreseen, may have a material adverse effect
on the financial condition, business or properties of the Borrower.
(o) Neither this Agreement, nor the financial statements referred to
herein, nor any certificate delivered pursuant to this Agreement, nor any other
agreement, document, certificate or written statement furnished to the Lender or
to the Lender's counsel by or on behalf of the Borrower in connection with the
transactions contemplated by this Agreement contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained herein or therein not misleading. There is no fact within
the knowledge of any of the executive officers of the Borrower which has not
been disclosed herein or in writing by them to the Lender and which materially
adversely affects, or in the future may, insofar as they can now foresee,
materially adversely affect the business, properties assets or condition,
financial or otherwise, of the Borrower.
(p) As to any items of Collateral which are or are to become fixtures, the
Premises, except for the office location leased at 1125 Richmond Avenue, Suite
104, Houston, Texas, constitute the real estate upon which such fixtures are or
will be affixed, except for certain. All
17
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holders of real estate interests in the Premises (other the office location
leased at 1125 Richmond Avenue, Suite 104, Houston, Texas) are listed on Exhibit
hereto.
(q) The Borrower has furnished to the Lender true, complete and correct
copies of the Acquisition Agreement. The Acquisition Agreement constitutes the
complete understanding among the signatories thereto in respect of the
Acquisition and same have not been amended, supplemented or modified. The
Acquisition Agreement has been duly executed and delivered by all parties
thereto, is in full force and effect as of the date of this Agreement, and no
default exists thereunder; the Acquisition Agreement constitutes the legal,
valid and binding obligation of the parties thereto. All representations and
warranties made in the Acquisition Agreement by any party thereto are true and
correct in all material respects on the date hereof as if made on and as of such
date.
(r) (i) The Acquisition Transactions will be duly consummated in
accordance with the Acquisition Agreement and in compliance with all applicable
laws; provided, however, all transactions which are contemplated to take place
-------- -------
after the date hereof shall be consummated at the times provided in the
Acquisition Agreement;
(ii) All necessary approvals and notices have been obtained or given
with respect to the Acquisition (including, without limitation, approvals and
notices to be obtained from or given to shareholders or governmental and/or
judicial authorities);
(iii) All conditions in the Acquisition Agreement to the consummation
of the Acquisition have been satisfied in all material respects by the parties
to the Acquisition Agreement;
(iv) After giving effect to the consummation of the Acquisition and
the extension of the financial accommodations contemplated by this Agreement and
all other agreements executed or delivered or financial accommodations received
by the Borrower in connection therewith, the Borrower (w) will be able to pay
its debts as they become due, (x) will have funds and capital sufficient to
carry on its business as now conducted or as contemplated to be conducted, (y)
owns property having a value both at fair valuation and at present fair salable
value greater than the amount required to pay its debts as they become due, and
(z) is not insolvent and will not be rendered insolvent as determined by
applicable law.
ARTICLE VIII
AFFIRMATIVE COVENANTS
Section 8.01. Affirmative Covenants. Without limiting any other covenants
---------------------
and provisions hereof, the Borrower covenants and agrees that, so long as any
Loan is outstanding or any obligation of the Borrower to the Lender, in any
capacity, remains unpaid, or any commitment by the Lender
18
<PAGE>
to the Borrower is in effect:
(a) The Borrower will pay the principal of and interest on the Notes at
the times and place and in the manner provided in the Notes and herein, and will
promptly pay when due any and all other amounts owing to the Lender hereunder in
respect of fees or otherwise.
(b) The Borrower will pay and discharge all taxes, assessments and
governmental charges or levies imposed upon it or them, or upon its or their
income or profits, or upon any properties belonging to it or them, prior to the
date on which penalties or interest would attach thereto, and all lawful claims
which, if unpaid, might become a lien or charge upon any properties of the
Borrower; provided, that the Borrower shall not be required to pay any such tax,
--------
assessment, charge, levy or claim which is being contested in good faith and by
proper proceedings which serve as a matter of law to stay the enforcement of any
remedy of the taxing authority or claimant and as to which the Borrower shall
have set aside on its books adequate reserves. The Borrower will pay, in a
timely manner, all lease obligations, all trade debt, purchase money
obligations, equipment lease obligations and all of its other Indebtedness. The
Borrower will fully, faithfully and punctually perform and fulfill all covenants
and agreements under any leases of real estate, agreements relating to purchase
money debt, equipment leases and other material contracts.
(c) The Borrower will maintain insurance with responsible and reputable
insurance companies or associations satisfactory to the Lender in such amounts
and covering such risks as shall be satisfactory to the Lender from time to
time, but in any event in amounts sufficient to prevent the Borrower from
becoming a co-insurer, and which shall in no event be less than the amount and
coverage in effect on the date of this Agreement and as reflected in the
certificates of insurance delivered by the Borrower to the Lender on the date
hereof. All insurance herein provided for shall be in such form and written by
such companies as may be satisfactory to the Lender. Regardless of the types or
amounts of insurance required and approved by the Lender, the Borrower shall
assign and deliver to the Lender duplicate original copies or certificates for
all policies of insurance, as collateral and further security for the
obligations of the Borrower herein contained, with the Lender named as
additional insured and as first loss payee. All policies of insurance shall
contain a provision forbidding cancellation of such insurance either by the
carrier or by the insured until at least thirty (30) days after written notice
of the proposed cancellation is given by registered mail, return receipt
requested, to the Lender; and whenever any insurance is to expire for any
reason, the Borrower will deliver to the Lender, at least thirty (30) days prior
to such expiration, a renewal or replacement policy, complying with all of the
conditions of this Section, marked "premium paid" or accompanied by other
evidence of payment satisfactory to the Lender. Any sums received by the Lender
in payment of losses under such policies may, at the option of the Lender,
either (i) be applied to the payment or prepayment of any obligations of the
Borrower to the Lender, or (ii) be transmitted in whole or in part to the owner
of the property damaged or destroyed for the purpose of repairing or replacing
the same.
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<PAGE>
(d) The Borrower will preserve and maintain its corporate existence,
rights, franchises and privileges and remain in good standing in the
jurisdiction of its incorporation. The Borrower will qualify and remain
qualified as a foreign corporation in each jurisdiction in which it maintains an
office or other facility and each other jurisdiction in which such qualification
is necessary or desirable in view of its business and operations or the
ownership of its properties.
(e) The Borrower will comply with the requirements of all applicable laws,
rules, regulations and the orders of any court or other tribunal or governmental
or administrative authority or agency applicable to it or its business, property
or assets.
(f) The Borrower will, at any reasonable time, and from time to time (and
at any time following the occurrence of an Event of Default), permit the Lender,
and any agents or representatives thereof, to examine and make copies of, and
take abstracts from, the records and books of account of, and visit the
properties of the Borrower, and to discuss the affairs, finances and accounts of
the Borrower with any of its managers, officers or directors and independent
accountants, all of whom are hereby authorized and directed to cooperate with
the Lender in carrying out the intent of this Section 8.01(f).
(g) The Borrower will keep proper and complete records and books of
account in which complete entries will be made in accordance with GAAP
consistently applied reflecting all financial transactions of the Borrower.
(h) The Borrower will maintain and preserve all of its properties
necessary or useful in the proper conduct of its business in good working order
and condition, making all necessary repairs thereto and replacements thereof.
The Borrower agrees that it will maintain and repair the Collateral and the
Premises (in the case of leased Premises, to the extent required by the lease
thereof) and keep all of same in good and serviceable condition and in at least
as good condition and repair as same were on the date hereof, or in such better
condition and repair as same may have been put thereafter. The Borrower will not
waste or destroy or suffer the waste or destruction of the Collateral or the
Premises or any part thereof. The Borrower will not use any of the Collateral or
the Premises in violation of any insurance thereon. In the event of damage to or
destruction of all or any part of the Premises or the Collateral from any cause,
the Borrower shall repair, replace, restore and reconstruct the Premises (in the
case of leased Premises, to the extent required by the lease thereof) and the
Collateral to the extent necessary to restore each portion of same to
substantially its condition immediately prior to such damage or destruction, and
this obligation shall not be limited by the amount of insurance proceeds
available.
(i) The Borrower will maintain experienced and competent professional
senior management with respect to its business and properties.
(j) The Borrower will conduct, in the ordinary course, the business in
which it is
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presently engaged, and the Borrower will not enter into any other lines of
business, businesses or ventures.
(k) The Borrower will furnish waivers in favor of the Lender from each
holder of a real estate interest in any of the Premises.
(l) The Borrower will maintain its presently existing deposit and
operating accounts at the Lender.
Section 8.02. Financial Covenants.
-------------------
The Borrower covenants and agrees that, so long as any Loan is outstanding
or any obligation of the Borrower to the Lender, in any capacity, remains
unpaid, or any commitment by the Lender to the Borrower is in effect:
(a) At all times, the Borrower will maintain a ratio of Current Assets to
Current Liabilities of greater than or equal to 1.50 to 1.00.
(b) The Borrower shall maintain a ratio of Total Debt to Tangible Net
Worth less than or equal to the following:
(i) 2.20 to 1.00 as of September 30, 1999;
(ii) 2.00 to 1.00 as of September 30, 2000 and thereafter.
(c) The Borrower shall maintain a ratio of Cash Flow to Debt Service
Payments of greater than or equal to 1.00 to 1.00 as of September 30, 1999 and
1.25 to 1.00 as of September 30, 2000 and thereafter.
ARTICLE IX
NEGATIVE COVENANTS
Section 9.01. Negative Covenants. The Borrower covenants and agrees that,
------------------
so long as any Revolving Loan is outstanding or any obligation of the Borrower
to the Lender, in any capacity, has not been fully performed or any commitment
by the Lender to the Borrower is in effect:
(a) The Borrower will not create, incur, assume or suffer to exist, any
Indebtedness, except for:
(i) the Notes;
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<PAGE>
(ii) Indebtedness of the Borrower for taxes, assessments and
governmental charges or levies, to the extent payment thereof shall not at
the time be required under Section [__] hereof;
(iii) unsecured Current Liabilities of the Borrower (other than
for money borrowed or for the deferred purchase of property) incurred upon
customary terms in the ordinary course of business;
(iv) Indebtedness to the Lender, whether arising hereunder or
otherwise;
(v) Indebtedness owed with respect to financing leases or the
purchase and lease-back of equipment on terms satisfactory to the Lender in
an aggregate principal amount which will not exceed $100,000 outstanding at
any one time;
(vi) Indebtedness secured by a lien permitted pursuant to
Section [___] hereof;
(vii) the Assumed Payables, as defined in the Acquisition
Documents; and
(viii) Indebtedness existing at the date hereof, but only to the
extent set forth on Exhibit [ ] hereto.
------------
(b) The Borrower will not create, incur, assume or suffer to exist, any
mortgage, deed of trust, pledge, lien, security interest, or other charge or
encumbrance (including the lien or retained security title of a conditional
vendor) of any nature (collectively, "Liens"), upon or with respect to any of
its property or assets, now owned or hereafter acquired, except that the
foregoing restrictions shall not apply to:
(i) Liens for taxes, assessments or governmental charges or
levies on property of the Borrower if the same shall not at the time be
delinquent or thereafter can be paid without interest or penalty;
(ii) Liens imposed by law, such as carriers', warehousemen's
and mechanics' liens and other similar Liens arising in the ordinary course
of business for sums not yet due or which are being contested in good faith
and by appropriate proceedings which serve as a matter of law to stay the
enforcement thereof and as to which adequate reserves have been made;
(iii) Liens arising out of pledges or deposits under workmen's
compensation laws, unemployment insurance, social security, retirement
benefits or similar legislation;
22
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(iv) Liens in favor of the Lender;
(v) Liens relating to leased equipment under leases or lease-
backs permitted by Section [___________] hereof, but not any refinancing or
extension thereof, provided that (A) each such Lien is given solely to
secure the purchase price of such property, does not extend to any other
property and is given at the time of the acquisition of such property and
(B) the Indebtedness secured thereby does not exceed the lesser of the cost
of such property or its fair market value at the time of acquisition;
(vi) Purchase money security interests incurred as a result of
Borrower's purchase of equipment in the ordinary course of business; or
(vii) Liens existing at the date hereof, but only to the extent
set forth on Exhibit [__] hereto.
------------
(c) The Borrower will not assume, guarantee, endorse or otherwise become
directly or contingently liable (including, without limitation, liable by way of
agreement, contingent or otherwise, to purchase, to provide funds for payment,
to supply funds to or otherwise invest in any debtor or otherwise to assure any
creditor against loss) in connection with any Indebtedness of any other Person,
except (i) guaranties by endorsement or similar transactions in the ordinary
course of business, and (ii) liability of the Borrower to the Lender, under this
Agreement or otherwise.
(d) The Borrower will not liquidate or dissolve, or merge or consolidate
with any other Person (except for a merger or consolidation wherein the Borrower
is the surviving entity), or sell, assign, lease or otherwise dispose of
(whether in one transaction or in a series of transactions) any item or items
material to its business (whether now owned or hereafter acquired) included in
the assets of the Borrower (except for the sale of Inventory in the ordinary
course of business), or turn over the management of, or enter into a management
contract with respect to, its properties, assets, rights or licenses.
(e) The Borrower will not sell, assign (other than the assignment to the
Lender contained in the Security Instruments) or dispose in any way of any
Receivables, with or without recourse, except for an assignment for collection
in the ordinary course of business.
(f) The Borrower will not make any loan or advance to any Person or
purchase or otherwise acquire, the capital stock, assets comprising the business
of, or obligations of, or any interest in, any Person, except:
(i) evidences of Indebtedness issued or guaranteed by the
United States of America which have a maturity of not more than one year
from the date of acquisition;
(ii) certificates of deposit, notes, acceptances and repurchase
agreements
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having a maturity of not more than one year from the date of acquisition
issued by the Lender or by any other bank organized in the United States
having capital, surplus and undivided profits of at least $100,000,000, and
interest-bearing accounts in the Lender or any such other bank;
(iii) accounts in any "money market" mutual fund having total
assets in excess of $100,000,000; and
(iv) acquisitions of businesses similar to the business in
which the Borrower is currently engaged or assets used or useful in such
other businesses in an amount not exceeding $1,000,000 if, after giving
effect to such acquisitions, the Borrower shall be in compliance with
Section [____] hereof.
(g) The Borrower will not establish any new pension or defined benefit plan
or modify any such existing plan for employees subject to ERISA, which plan
provides any benefits based on past service, without the advance consent of the
Lender to the amount of the aggregate past service liability thereby created.
(h) The Borrower will not waive any debt or claim (including any
Receivable), except as expressly permitted by the terms of this Agreement.
(i) The Borrower will not directly or indirectly make any optional or
voluntary prepayment or purchase of long-term debt to any Person (other than the
Lender).
(j) The Borrower will not remove from the Premises referred to in Section
[____] any books or records relating to Receivables or remove therefrom any
Collateral (other than Inventory sold to customers in the ordinary course of the
Borrower's business), except upon the prior written consent of the Lender.
(k) The Borrower will not move its principal place of business or chief
executive office from the address described in Section [____] except upon the
prior written consent of the Lender.
(l) The Borrower will not enter into any sale-leaseback transaction except
as otherwise permitted in Section [_____].
(m) The Borrower will not organize or form any new Subsidiaries, or become
a member of any partnership or joint venture.
(n) The Borrower will not write up (by creating an appraisal surplus or
otherwise) the value of any assets of the Borrower above their cost to the
Borrower less depreciation regularly allowable thereon.
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(o) The Borrower will not (i) declare or pay any cash dividends, (ii)
purchase, redeem, retire or otherwise acquire for value any of its capital stock
(or rights, options or warrants to purchase such shares) now or hereafter
outstanding, (iii) return, directly or indirectly, any capital to its
stockholders or make, directly or indirectly, any distribution of assets to its
stockholders.
(p) The Borrower will not change its fiscal year or change its capital
structure.
(q) The Borrower will not enter into any transaction, including, without
limitation, the purchase, sale or exchange of any property, or the rendering of
any service, with any Affiliate, except in the ordinary course of, and pursuant
to the reasonable requirements of, the Borrower's business and upon fair and
reasonable terms no less favorable to the Borrower than would be obtained in a
comparable arms'-length transaction with any Person not an Affiliate. As used
herein, the term "Affiliate" includes (i) any officer or director of the
Borrower, or (ii) any Person which, directly or indirectly, through one or more
intermediaries, controls or is controlled by, or is under common control with,
the Borrower or (iii) any Person which beneficially owns or holds five (5%)
percent or more of any class of equity or debt securities of the Borrower. The
term "control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of any Person,
whether through the ownership of voting securities, by contract or otherwise.
(r) The Borrower will not dispose of, or suffer or permit the disposal of,
any hazardous material or oil on any site or vessel owned, occupied or operated
by the Borrower; nor shall the Borrower suffer or permit to exist or store on
any site or vessel owned, occupied or operated by the Borrower, or transport or
arrange the transport of, any hazardous material or oil, except under valid
permits and licenses and otherwise in compliance with all applicable laws and
regulations. The Borrower shall provide the Lender with written notice of (i)
any release or threat of release of any hazardous material or oil at or from any
site or vessel owned, occupied or operated by the Borrower, and (ii) any
incurrence of any expense or loss by any governmental authority in connection
with the assessment, containment or removal of any hazardous material or oil for
which expense or loss the Borrower may be liable.
ARTICLE X
FINANCIAL REPORTING REQUIREMENTS
Section 10.01. Reporting Requirements. So long as any Revolving Loan shall
----------------------
be outstanding or any other obligation of the Borrower to the Lender, in any
capacity, shall remain unpaid, or any commitment by the Lender to the Borrower
shall remain in effect, the Borrower shall furnish to the Lender:
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(a) As soon as available and in any event within thirty (30) days after the
end of each month, internally prepared financial statements as of the end of
such period, and for the period from the beginning of the then current fiscal
year to the end of such period, certified by Borrower's President or Chief
Financial Officer as being prepared in accordance with sound financial practices
and as being true and correct in all material respects;.
(b) As soon as available and in any event within ninety (90) days after the
end of each fiscal year of the Borrower, a copy of the consolidated audited
financial statements for such fiscal year for the Borrower, including therein
balance sheets of the Borrower as at the end of such fiscal year and statements
of income and retained earnings and cash flows for the Borrower for such fiscal
year, setting forth in comparative form the correspondence figures for the
preceding year. The annual financial statements shall be certified by
independent certified public accountants selected by the borrower and acceptable
to the Lender in such form as is generally recognized as "unqualified". The
Borrower's existing auditing firm, Arthur Anderson LLP, is acceptable to the
Lender.
(c) At the time of delivery of each annual statement of the Borrower and at
the time of delivery of the monthly statement for the third, sixth and ninth
months of each fiscal year of the Borrower, a certificate executed by the chief
financial officer of the Borrower stating that he has reviewed this Agreement
and has no knowledge of any default by the Borrower in the performance or
observance of any of the provisions of this Agreement or, if he has such
knowledge, specifying each such default and the nature thereof, which
certificate shall be accompanied by a statement of such chief financial officer
setting forth in detail the computations necessary to determine compliance with
the financial covenants contained in Section 8.02 hereof.
(d) Simultaneously with its filing with the SEC, a copy of the Borrower's
Form 10-Qsb report.
(e) As soon as practicable but, in any event, within fifteen (15) days
after the issuance thereof, copies of such other financial statements and
reports as Borrower shall send to its stockholders.
(f) Not less than thirty (30) days after the beginning of each fiscal year,
projections for the next following fiscal year, setting forth projected
revenues, expenditures and results.
(g) Immediately after the Borrower receives notice of the occurrence of
each Event of Default and any event which, with the giving of notice or lapse of
time or both, could constitute an Event of Default, a statement of the Borrower
setting forth details of such Event of Default or event and the action which the
Borrower proposes to take with respect thereto.
(h) Promptly after the commencement thereof, notice of all actions, suits
and proceedings
26
<PAGE>
before any court or governmental department, commission, board, bureau, agency
or instrumentality, domestic or foreign, affecting the Borrower.
(i) Promptly after receipt, a copy of all audits or reports submitted to
the Borrower by independent public accountants in connection with any annual,
special or interim audits of the books of the Borrower and any letter of
comments directed by such accountants to the management of the Borrower.
(j) As soon as possible and in any event within thirty (30) days after the
Borrower knows or has reason to know that any event which would constitute a
reportable event under Section 4043(b) of Title IV of ERISA with respect to any
employee pension or other benefit plan subject to such Title has occurred, or
that the PBGC or the Borrower has instituted or will institute proceedings under
such Title to terminate such plan, a certificate of the chief financial officer
of the Borrower, setting forth details as to such reportable event and the
action which the Borrower proposes to take with respect thereto, together with a
copy of any notice of such reportable event which may be required to be filed
with the PBGC, or any notice delivered by the PBGC evidencing its intent to
institute such proceedings, or any notice to the PBGC that the plan is to be
terminated, as the case may be. The Borrower shall furnish to the Lender (or
cause the plan administrator to furnish to the Lender) the annual report for
each plan covered by Title IV and filed with the PBGC not later than ten (10)
days after such report has been filed with the PBGC.
(k) Promptly after the Borrower has knowledge thereof, written notice of:
(i) termination or potential termination of any consent,
license, permit or franchise which is material to the conduct of the
business of the Borrower;
(ii) any material loss, damage or destruction to or of any
property or assets of the Borrower (regardless of whether the same is
covered by insurance);
(iii) any material controversy on the part of the Borrower with
its employees or with any labor organization; and
(iv) any other material development adversely affecting the
Borrower or its business, properties, assets or condition, financial or
otherwise.
(l) Promptly upon the occurrence of any change in any of the present
officers or directors of the Borrower, all of whom are listed on Exhibit [___]
-------------
hereto, a notice of such change.
(m) Such other information respecting the financial condition, operations,
Receivables, Inventory, machinery or equipment of the Borrower as the Lender may
from time to time reasonably request.
27
<PAGE>
ARTICLE XI
DEFAULT AND REMEDIES
Section 11.01. Events of Default. The occurrence of any one of the
-----------------
following events shall constitute an Event of Default hereunder:
(a) The Borrower shall fail to make any payment of principal of or interest
on the Revolving Note or any other obligation in respect thereof on or before
the date when due and beyond any applicable grace period or shall fail to pay
any fee under Section [___] or reimbursement obligation under Section 3.04 on
the date when due or beyond any applicable grace period; or
(b) Any representation or warranty of the Borrower contained herein shall
at any time prove to have been incorrect in any material respect when made or
any representation or warranty made by the Borrower in connection with the
execution and delivery of this Agreement or any other instrument, document,
certificate or statement executed and delivered in connection with any Revolving
Loan shall at any time prove to have been incorrect in any material respect when
made; or
(c) The Borrower shall default in the performance or observance of any
agreement or obligation under Sections 8.01(b), (c), (e), (g), (h) and (i), and
10.01 (a), (b), (c), (d), (e) and (f) and such default shall continue unremedied
for five (5) days after notice thereof shall have been given by the Lender to
the Borrower; or
(d) The Borrower shall default in the performance of any other term,
covenant or agreement contained in this Agreement and such default shall
continue unremedied for five (5) days after notice thereof shall have been given
by the Lender to the Borrower; or
(e) Any default on the part of the Borrower shall exist, and shall remain
unwaived or uncured beyond the expiration of any applicable notice and/or grace
period, under any note, contract, agreement or understanding now existing or
hereafter entered into with or for the benefit of the Lender in any capacity or
capacities; or
(f) Any default shall exist and remain unwaived or uncured with respect to
any Indebtedness of the Borrower, or any such Indebtedness shall not have been
paid when due, whether by acceleration or otherwise, or shall have been declared
to be due and payable prior to its stated maturity, or any event or circumstance
shall occur which permits, or with the lapse of time or giving of notice or both
would permit, the acceleration of the maturity of any such Indebtedness by the
holder or holders thereof; or
28
<PAGE>
(g) The Borrower shall be dissolved, or the Borrower shall become insolvent
or file a petition pursuant to 11 U.S.C. (S)101 et seq. or shall cease paying
-------
its debts as they mature or shall make an assignment for the benefit of
creditors, or a trustee, receiver or liquidator shall be appointed for the
Borrower or for a substantial part of its property, or bankruptcy,
reorganization, arrangement, insolvency or similar proceedings shall be
instituted against the Borrower under the laws of any jurisdiction and such
proceedings shall not be dismissed or stayed within [ninety (90) days] [sixty
(60) days] of the commencement thereof; or
(h) Any writ, attachment, execution or similar process shall be issued or
levied against the Borrower or any of its property and such writ, attachment,
execution or similar process shall not be paid, released, vacated or fully
bonded within five (5) days after its issue or levy; or
(i) The Borrower shall fail to meet its minimum funding requirements under
ERISA with respect to any employee benefit plan (or other class of benefit which
the PBGC has elected to insure) or any such plan shall be the subject of
termination proceedings (whether voluntary or involuntary); or
(j) The Borrower shall suffer substantial loss, theft, taking, damage or
destruction to or of any of its property which either (i) is uninsured or (ii)
if insured, nonetheless would have a material adverse effect upon the business,
prospects, operations or financial condition of the Borrower; or
(k) The security interest and lien of the Lender in and on any of the
Collateral shall not be in full force and effect as a fully perfected first
priority lien; or
(l) There shall be entered against the Borrower any final uninsured
judgment which, singly or with any other final uninsured judgment or judgments
against the Borrower then remaining unpaid, exceeds $100,000.
Section 11.02. Rights and Remedies on Default. Upon the occurrence of any
------------------------------
Event of Default and at any time thereafter, in addition to any other rights and
remedies available to the Lender hereunder or otherwise, the Lender may exercise
any one or more of the following rights and remedies (all of which shall be
cumulative):
(a) Declare the entire unpaid principal amount of the Notes then
outstanding, all interest accrued and unpaid thereon and all other amounts
payable under this Agreement, and all other Indebtedness of the Borrower to the
Lender, to be forthwith due and payable, whereupon the same shall become
forthwith due and payable, without presentment, demand, protest or notice of any
kind, all of which are hereby expressly waived by the Borrower.
(b) Terminate the Revolving Commitment hereunder.
29
<PAGE>
(c) Exercise all of the rights and remedies of a secured party under the
Uniform Commercial Code. The Lender may enter upon the Premises and may take
physical possession of the Collateral or render the Collateral unusable by
process of law or peaceably without process of law. The Borrower shall
peacefully and quietly yield up and surrender its Collateral and shall upon the
request from the Lender assemble it and make it available to the Lender at a
place or places designated by the Lender which is or are reasonably convenient
to the Borrower and the Lender. The Lender may maintain possession of any
Collateral on any property owned, leased by or licensed to the Borrower or
remove same or any part thereof to such place or places as the Lender may elect.
The Borrower will also deliver to the Lender upon request all documents of title
and other instruments relating to the Collateral. The Borrower waives all rights
which it would otherwise have had under law to prohibit entry to any Premises or
to require notice of any replevin or retaking, all to the extent that the same
is permitted by law. The Lender may with only such demand, advertising or notice
as may be required by law, sell and deliver any and all Collateral held by it
for its account at any time or times in one or more private or public sales, for
cash or credit or otherwise, at such price and upon such terms as the Lender
deems advisable in its sole discretion. Notice of any public sale shall be
sufficient if it describes the Collateral to be sold in general terms, stating
the amounts thereof and the location and nature of the properties covered by the
security interests and the prior liens thereon, and is published at least once,
not less than seven (7) days prior to the sale, in any newspaper of general
circulation in the locale of the Collateral to be sold which the Lender may
elect. All requirements of reasonable notice shall be met if such notice is sent
to the Borrower, in the manner provided in Section 14.03 below, at least seven
(7) days before the time of such sale or disposition. The Lender may be the
purchaser at any such sale, if it is public, free from any right of redemption.
The proceeds of sale shall be applied first to the costs of retaking,
refurbishing, storing and selling any Collateral hereunder and to other costs of
collection, and then to the payment of obligations of the Borrower to the
Lender. The Lender shall be entitled to apply any collections on account of the
Revolving Note first to fees, costs and charges accrued to the date of receipt,
next to accrued interest and only thereafter to principal. Any excess shall be
returned to the Borrower, and the Borrower shall remain liable for any
deficiency.
(d) Enforce the provisions of this Agreement by legal proceedings for the
specific performance of any covenant or agreement contained herein or for the
enforcement of any other appropriate legal or equitable remedy, and the Lender
may recover damages caused by any breach by the Borrower of the provisions of
this Agreement, including court costs, reasonable attorneys' fees and other
costs and expenses incurred in the enforcement of the obligations of the
Borrower hereunder.
(e) Exercise all rights and remedies hereunder, under each of the Notes,
the Security Instruments and under any other agreement with the Lender; and
exercise all other rights and remedies which the Lender may have under
applicable law.
Section 11.03. Set-off. In addition to any rights now or hereafter
-------
granted under applicable
30
<PAGE>
law and not by way of limitation of any such rights, upon the occurrence of any
Event of Default, the Lender is hereby authorized at any time or from time to
time, without presentment, demand, protest or other notice of any kind to the
Borrower or to any other Person, all of which are hereby expressly waived, to
set off and to appropriate and apply any and all deposits (general or special)
and any other Indebtedness at any time held or owing by the Lender to or for the
credit or the account of the Borrower against and on account of the obligations
and liabilities of the Borrower to the Lender under this Agreement or otherwise,
irrespective of whether or not the Lender shall have made any demand hereunder
and although said obligations or liabilities, or any of them, may then be
contingent or unmatured and without regard for the availability or adequacy of
other collateral. The Borrower also grants to the Lender a security interest
with respect to all its deposits and all securities or other property in the
possession of the Lender from time to time, and, upon the occurrence of any
Event of Default, the Lender may exercise all rights and remedies of a secured
party under the Uniform Commercial Code.
ARTICLE XII
FURTHER PROVISIONS AS TO RECEIVABLES
Section 12.01. Title to Receivables. The Borrower represents and warrants
--------------------
to the Lender that each Receivable will be free and clear of all adverse
interests in favor of any Person other than the Lender. The Borrower represents
and warrants to the Lender that each Qualified Receivable will cover a bona fide
---------
provision of services usually dealt in by the Borrower in the ordinary course of
its business, will be subject to a fully perfected first priority security
interest in favor of the Lender and to no lien in favor of any other Person,
will be for a liquidated amount, will mature as stated in the duplicate invoice
covering such transaction, and will not be subject to any deduction, offset,
counterclaim or other condition other than the Borrower's usual discounts and
ordinary deductions.
Section 12.02. Furnishing Information. The Borrower will, at the Lender's
----------------------
request, deliver confirmatory written assignments of Receivables, but the
failure to execute or deliver any such assignment shall not affect or limit the
security interest of the Lender in any Receivable. Together with each such
assignment, if the Lender so requests, the Borrower will furnish the Lender with
copies of invoices to customers or the equivalent. The Borrower shall promptly
make, stamp or record such entries or legends on the Borrower's books and
records or on any of the Collateral as the Lender shall request from time to
time to indicate that the Lender has a security interest in such Collateral.
Section 12.03. Returns; Disputes. The Borrower shall notify the Lender
-----------------
promptly of all material disputes and claims with respect to Receivables. Other
than in the ordinary course of business, the Borrower shall not settle or adjust
any dispute or claim and no extraordinary discount, credit or allowance shall be
granted without the Lender's consent. Upon the occurrence of any Event
31
<PAGE>
of Default, the Lender may settle or adjust disputes or claims directly with
customers or account debtors for amounts and upon terms which it considers
advisable. In all cases, the Borrower's account will be credited only with
amounts actually received by the Lender. When the Borrower has received
Collateral of any kind or nature by reason of transactions between itself and
its customers or account debtors, it will hold the same on the Lender's behalf,
subject to the Lender's instructions, and as property forming part of the
Receivables.
Section 12.04. Collections. After the occurrence of an Event of Default,
-----------
the Lender or its designee may at any time notify customers or account debtors
of the Lender's security interest in Receivables, collect the same directly, and
charge the collection costs and expenses to the Borrower's account. Whenever the
Lender deems it desirable that any legal or other action be instituted in order
to effectuate collection of any Receivable, the Lender may at its option
reassign any such Receivable to the Borrower (and any such reassignment shall be
deemed to be without recourse to the Lender in any event) and require the
Borrower to proceed with such legal or other action at the Borrower's sole
liability, cost and expense, in which event all amounts collected by the
Borrower on such Receivable shall nevertheless be subject to this Agreement.
ARTICLE XIII
FURTHER RIGHTS OF THE LENDER
Section 13.01. Further Assurances. The Borrower shall do all things and
------------------
deliver all instruments reasonably requested by the Lender to protect or perfect
any security interest granted or intended to be granted under the Security
Instruments. If the Borrower fails promptly to comply with any such request, or
if any Event of Default shall have occurred hereunder, the Borrower authorizes
the Lender to execute, in the name or on behalf of the Borrower, any financing
statement or other document or instrument that the Lender may require to
perfect, protect or establish any security interest or lien interest to which
the Lender may be then entitled and further authorizes the Lender to sign the
Borrower's name on the same. The Borrower appoints (but only for the purposes
of protecting the Lender's interests in the Collateral or its rights to receive
payments under this Agreement or the Revolving Note or otherwise exercising any
of its rights or causing the performance and fulfillment of the obligations and
agreements intended to be performed and fulfilled by the Borrower) such Person
or Persons as the Lender may designate as the Borrower's attorney-in-fact with
the power to endorse the name of the Borrower on any checks, notes, drafts, or
other forms of payment or security relating to any Collateral that may come into
the possession of the Lender; to sign the name of the Borrower on invoices or
bills of lading, drafts against customers, notices of assignment, verifications
and schedules; to demand, collect, receive payment of, receipt for, settle,
compromise or adjust and give discharges and releases in respect of the
Receivables or any of them; to commence and prosecute any suits, actions or
proceedings at law or in equity in any court of competent jurisdiction to
collect the Receivables or any of them and to enforce any other rights in
32
<PAGE>
respect thereof or in respect of the goods which have given rise thereto; to
defend any suit, action or proceeding brought against the Borrower in respect of
any Receivables or the goods which have given rise thereto, to settle,
compromise or adjust any such suit, action or proceeding and, in connection
therewith, to give such discharges or releases as the Lender may deem
appropriate; to notify the U.S. Postal Service authorities to change the address
of delivery of mail to an address designated by the Lender and to open and
dispose of mail addressed to the Borrower; and, generally, to do all things
necessary to carry out the intent of this Agreement. This power, being coupled
with an interest, is irrevocable, and the Borrower approves all acts of such
attorney-in-fact. The powers conferred on the Lender by this Agreement and the
Security Instruments are solely to protect the interest of the Lender and shall
not impose any duty upon the Lender to exercise any such power, and neither the
Lender nor such attorney-in-fact shall be liable for any act or omission, error
in judgment or mistake of law, except for its actual willful misconduct or bad
faith. The Lender shall have no duty as to the collection or protection of any
Collateral and shall have no duty as to the preservation of rights against prior
parties or any other rights pertaining thereto, except as provided by applicable
law.
Section 13.02. Right to Cure. In the event that the Borrower shall fail to
-------------
purchase or maintain insurance, to pay any tax, assessment, government charge or
levy, except as the same may be otherwise permitted hereunder, or in the event
that any lien, encumbrance or security interest prohibited hereby shall not be
paid in full or discharged, or in the event that the Borrower shall fail to pay
or comply with any other obligation hereunder, the Lender may, but shall not be
required to, pay, satisfy, perform, discharge or bond the same for the account
of the Borrower, and all moneys so paid by the Lender shall be payable on demand
and shall bear interest at the maximum rate in effect and permitted by this
Agreement.
ARTICLE XIV
MISCELLANEOUS
Section 14.01. No Waiver; Cumulative Remedies. No failure or delay on the
------------------------------
part of the Lender in exercising any right, power or remedy hereunder shall
operate as a waiver thereof; nor shall any single or partial exercise of any
such right, power or remedy preclude any other or further exercise thereof or
the exercise of any other right, power or remedy hereunder. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law or
otherwise available to the Lender. The Lender's remedies may be exercised
without resort or regard to any other source of satisfaction of any liabilities
of the Borrower to the Lender. The provisions of this Agreement are not in
derogation or limitation of any obligations, liabilities or duties of the
Borrower under the Security Instruments or any other agreement with or for the
benefit of the Lender. No inconsistency in default provisions between this
Agreement and the Security Instruments or any such other agreement will be
deemed to create any additional grace period or otherwise derogate from the
33
<PAGE>
express terms of each such default provision. No covenant, agreement or
obligation of the Borrower contained herein, nor any right or remedy of the
Lender contained herein, shall in any respect be limited by or be deemed in
limitation of any inconsistent or additional provisions contained in the
Security Instruments or any such other agreement.
Section 14.02. Amendments, Waivers and Consents. Neither this Agreement nor
--------------------------------
any provision hereof may be amended, waived, discharged or terminated orally,
but only by a statement in writing signed by the party against whom enforcement
of the amendment, waiver, discharge or termination is sought. Any waiver or
consent may be given subject to satisfaction of conditions stated herein and any
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given.
Section 14.03. Addresses for Notices, etc. Except as otherwise expressly
---------------------------
provided hereunder, all notices, requests, demands and other communications
provided for hereunder shall be in writing (including telegraphic communication)
and shall be mailed or telegraphed or delivered to the applicable party at the
address indicated below:
If to the Borrower:
Benthos, Inc.
49 Edgerton Drive
North Falmouth, MA 02556-2826
Attn: John L. Coughlin, President and CEO
Phone: 508-563-1000
Fax: 508-563-6444
With a copy to:
Davis, Malm & D'Agostine, P.C.
One Boston Place
Boston, MA 02188
Attn: John T. Lynch, Esq.
Phone: 617-367-2500
Fax: 617-305-3120
34
<PAGE>
If to the Lender:
Cape Cod Bank and Trust Company
P.O. Box 1180
South Yarmouth, MA 02644-0180
Attn: Timothy F. Kelleher, III, Vice President
Phone: (508)760-8521
Fax: (508)564-6752
With a copy to:
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, MA 02111
Attn: Daniel Gaquin, Esq.
Phone: 617-542-6000
Fax: 617-542-2241
or, as to each of the foregoing, at such other address as shall be designated by
such Person in a written notice to the other party complying as to delivery with
the terms of this Section. Except as otherwise hereinabove provided, all such
notices, requests, demands and other communications shall, when mailed or
telegraphed, respectively, be effective when deposited in the mails or delivered
to the telegraph company, respectively, addressed as aforesaid. If any such
notice, request, demand or other communication is delivered, same shall be
effective upon delivery.
Section 14.04. Costs, Expenses and Taxes. The Borrower agrees to pay on
-------------------------
demand all costs and expenses (including, without limitation, reasonable legal
fees) of the Lender in connection with the preparation, execution and delivery
of this Agreement, the Notes and all other instruments and documents to be
delivered hereunder and any amendments or modifications of any of the foregoing,
or in connection with the examination, review or administration of any of the
foregoing, or in connection with the confirmation, perfection and/or protection
of the security interests granted hereby or thereby, as well as the costs and
expenses (including, without limitation, the reasonable fees and out-of-pocket
expenses of legal counsel) incurred by the Lender in connection with
interpreting, administering, preserving, enforcing or exercising any rights or
remedies under this Agreement, the Notes and all other instruments and documents
to be delivered hereunder, all whether or not legal action is instituted. In
addition, the Borrower shall be obligated to pay any and all stamp and other
taxes payable or determined to be payable in connection with the execution and
35
<PAGE>
delivery of this Agreement, the Notes and all other instruments and documents to
be delivered hereunder, and the Borrower agrees to save the Lender harmless from
and against any and all liabilities with respect to or resulting from any delay
in paying or omission to pay such taxes. Any fees, expenses or other charges
which the Lender is entitled to receive from the Borrower hereunder shall bear
interest until paid at a rate per annum equal to the maximum rate in effect and
permitted by this Agreement.
Section 14.05. Representations and Warranties. All covenants, agreements,
------------------------------
representations and warranties made herein or in other documents delivered by or
on behalf of the Borrower pursuant to or in connection with this Agreement are
material and shall be deemed to have been relied upon by the Lender,
notwithstanding any investigation heretofore or hereafter made by the Lender,
and shall survive the making of the Loans as herein contemplated, and shall
continue in full force and effect so long as the Loans or other amounts due
under this Agreement remain outstanding and unpaid. All statements contained in
any certificate or other paper delivered to the Lender at any time by or on
behalf of the Borrower pursuant hereto shall constitute representations and
warranties by the Borrower hereunder.
Section 14.06. Binding Effect; Assignment. This Agreement shall be binding
--------------------------
upon the Borrower and the Lender and their respective successors and assigns.
The Borrower may not assign this Agreement or any rights hereunder without the
express written consent of the Lender. The Lender may, in accordance with
applicable law, from time to time assign or grant participations in this
Agreement, the Loans and/or the Notes.
Section 14.07. Reproduction of Agreement. This Agreement and all other
-------------------------
instruments, documents and papers which relate thereto which have been or may be
hereafter furnished to the Lender may be reproduced by the Lender by any
photographic, photostatic, micro-card, miniature photographic, xerographic, or
similar process, and the Lender may destroy the original from which any document
was so reproduced. Any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding (whether or not the
original is in existence and whether or not such reproduction was made in the
regular course of business).
Section 14.08. Consent to Jurisdiction. The Borrower irrevocably submits to
-----------------------
the non-exclusive jurisdiction of any Massachusetts court or any federal court
sitting within The Commonwealth of Massachusetts over any suit, action or
proceeding arising out of or relating to this Agreement. The Borrower
irrevocably waives, to the fullest extent permitted by law, any objection which
it may now or hereafter have to the laying of venue of any such suit, action or
proceeding brought in such a court and any claim that any such suit, action or
proceeding has been brought in an inconvenient forum.
Section 14.09. Governing Law. This Agreement and the Notes shall be
-------------
governed by, and construed in accordance with, the laws of The Commonwealth of
Massachusetts, without regard to
36
<PAGE>
its principles of conflicts of laws.
Section 14.10. Severability. In the event that any provision of this
------------
Agreement or the application thereof to any Person, property or circumstances
shall be held to any extent to be invalid or unenforceable, the remainder of
this Agreement, and the application of such provision to Persons, properties or
circumstances other than those as to which it has been held invalid or
unenforceable, shall not be affected thereby, and each provision of this
Agreement shall be valid and enforceable to the fullest extent permitted by law.
Section 14.11. Headings. Article and Section headings in this Agreement and
--------
the cover page and table of contents preceding this Agreement are included
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.
SECTION 14.12. WAIVER OF TRIAL BY JURY. THE BORROWER HEREBY EXPRESSLY,
-----------------------
KNOWINGLY AND VOLUNTARILY WAIVES ALL BENEFIT AND ADVANTAGE OF ANY RIGHT TO A
TRIAL BY JURY, AND AGREES THAT IT WILL NOT AT ANY TIME INSIST UPON, OR PLEAD OR
IN ANY MANNER WHATSOEVER, CLAIM OR TAKE THE BENEFIT OR ADVANTAGE OF, A TRIAL BY
JURY IN ANY ACTION ARISING IN CONNECTION WITH THIS AGREEMENT, THE REVOLVING NOTE
OR ANY OF THE SECURITY INSTRUMENTS.
37
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, as an instrument under seal, by their respective officers thereunto
duly authorized as of the date first above written.
WITNESS: BENTHOS, INC.
/s/ JOHN T. LYNCH By: /s/ John L. Coughlin
_________________________ ___________________________
Name: John L. Coughlin
President and Chief Executive Officer
WITNESS: CAPE COD BANK AND TRUST
COMPANY
/s/ JOHN T. LYNCH By: /s/ Timothy F. Kelleher
_________________________ ___________________________
Name: Timothy F. Kelleher, III
Vice President
38
<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-KSB, into the Company's previously filed
Registration Statements File No. 333-19425 and File No. 333-60301.
Arthur Andersen LLP
Boston, Massachusetts
December 27, 1999
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF EARNINGS OF BENTHOS, INC. AND
SUBSIDIARY CONTAINED ELSEWHERE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 2,930
<SECURITIES> 0
<RECEIVABLES> 2,432
<ALLOWANCES> 220
<INVENTORY> 4,794
<CURRENT-ASSETS> 12,189
<PP&E> 6,641
<DEPRECIATION> 4,862
<TOTAL-ASSETS> 18,787
<CURRENT-LIABILITIES> 4,780
<BONDS> 4,649
0
0
<COMMON> 110
<OTHER-SE> 9,248
<TOTAL-LIABILITY-AND-EQUITY> 18,787
<SALES> 17,248
<TOTAL-REVENUES> 17,248
<CGS> 9,801
<TOTAL-COSTS> 4,385
<OTHER-EXPENSES> 2,113
<LOSS-PROVISION> 8
<INTEREST-EXPENSE> 49
<INCOME-PRETAX> 1,076
<INCOME-TAX> 248
<INCOME-CONTINUING> 828
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 828
<EPS-BASIC> .61<F1>
<EPS-DILUTED> .60<F1>
<FN>
<F1>THE EARNINGS PER SHARE INFORMATION HAS BEEN PREPARED IN ACCORDANCE WITH SFAS
NO. 128 AND BASIC AND DILUTED EARNINGS PER SHARE HAVE BEEN ENTERED IN PLACE OF
PRIMARY AND FULLY DILUTED, RESPECTIVELY.
</FN>
</TABLE>
