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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2005
COMMISSION FILE NUMBER: 0-12227
SUTRON CORPORATION
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(Exact name of registrant as specified in its charter.)
VIRGINIA 54-1006352
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21300 RIDGETOP CIRCLE, STERLING VIRGINIA 20166
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(Address of principal executive offices)
(703) 406-2800
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(Registrants telephone number, including area code)
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT: COMMON STOCK,
$.01 PAR VALUE
(Title of class)
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) for the Exchange Act. [_]
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [_] No [X]
Issuers' revenues for its most recent fiscal year were $15,434,255.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates as of March 24, 2006 was approximately $22,821,000 based on the
last sale price of such stock.
The number of shares outstanding of the issuers Common Stock, $.01 par value, as
of March 24, 2006 was 4,295,551.
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Transitional Small Business Disclosure format (check one): Yes [_] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants' definitive proxy statement for the 2006 Annual
Meeting of Shareholders, which will be filed within 120 days after the end of
the year covered by this Form 10-KSB, are incorporated in Part III as set forth
herein.
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SUTRON CORPORATION
FORM 10-KSB ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2005
TABLE OF CONTENTS
PART I
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Item 1. Description of Business 4
Item 2. Description of Property 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
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Item 5. Market for Common Equity and Related Stockholder Matters
and Small Business Issuer Purchases of Equity Securities 9
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 7. Financial Statements 18
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 34
Item 8A. Controls and Procedures 34
Item 8B. Other Information 34
PART III
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Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the 35
Exchange Act
Item 10. Executive Compensation 35
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 35
Item 12. Certain Relationships and Related Transactions 35
Item 13. Exhibits 35
Item 14. Principal Accountant Fees and Services 36
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PART I
THIS FORM 10-KSB INCLUDES FORWARD-LOOKING STATEMENTS REGARDING OUR EXPECTED
FUTURE FINANCIAL POSITION, RESULTS OF OPERATIONS, CASH FLOWS, FINANCING PLANS,
BUSINESS STRATEGY, PRODUCTS AND SERVICES, COMPETITIVE POSITIONS, GROWTH
OPPORTUNITIES, PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS, AS WELL
AS STATEMENTS THAT INCLUDE WORDS SUCH AS "ANTICIPATE," "IF," "BELIEVE," "PLAN,"
"ESTIMATE," "EXPECT," "INTEND," "MAY," "SHOULD" AND OTHER SIMILAR EXPRESSIONS
THAT ARE FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS INVOLVE
RISKS, UNCERTAINTIES AND CONTINGENCIES WHICH MAY CAUSE ACTUAL RESULTS,
PERFORMANCE, OR ACHIEVEMENTS TO DIFFER MATERIALLY FROM ANTICIPATED RESULTS,
PERFORMANCE, OR ACHIEVEMENTS. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS INCLUDE THOSE DISCUSSED
UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" AND ELSEWHERE IN THIS REPORT. ALL FORWARD-LOOKING STATEMENTS
SPEAK ONLY TO EVENTS AS OF THE DATE ON WHICH THE STATEMENTS ARE MADE. ALL
SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO US OR ANY
PERSON ACTING ON OUR BEHALF ARE QUALIFIED BY THE CAUTIONARY STATEMENTS IN THIS
SECTION. WE UNDERTAKE NO OBLIGATION TO UPDATE OR PUBLICLY RELEASE ANY REVISIONS
TO FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS, CIRCUMSTANCES OR CHANGES IN
EXPECTATIONS AFTER THE DATE ON WHICH THE STATEMENT IS MADE.
ITEM 1 - DESCRIPTION OF BUSINESS
--------------------------------
Sutron Corporation was incorporated on December 30, 1975 under the General Laws
of the Commonwealth of Virginia. Our headquarters is located at 21300 Ridgetop
Circle, Sterling, Virginia 20166, and the telephone number at that location is
(703) 406-2800. We maintain a worldwide web address at www.sutron.com . The
information contained on our website is not incorporated by reference into this
Form 10-KSB and shall not be considered a part of this Form 10-KSB.
We design, manufacture and market products and solutions that enable government
and commercial entities to monitor and collect hydrological, meteorological and
oceanic data for the management of critical water resources, for early warning
of potentially disastrous floods, storms or tsunamis and for the optimization of
hydropower plants. We provide real-time solutions and services to our customers
in three areas of the hydrological, meteorological and oceanic markets. First,
we provide real-time data collection and control products consisting primarily
of dataloggers, satellite transmitters and sensors. Second, we provide turnkey
integrated systems for hydrological networks, meteorological networks including
airport weather systems and oceanic networks. Third, we provide services
consisting of installation, maintenance of hydrological, meteorological and
oceanic systems, and other related engineering services. Our customers include a
diversified base of federal, state, local and foreign governments, engineering
companies, universities, and hydropower companies.
Our ongoing, principal strategic business units consist of the HydroMet Products
Division, the Integrated Systems Division and the Hydrological Services
Division. The Integrated Services Division includes the results of providing
airport weather systems, special projects, the Sutron India Branch Office and
Sutron HydroMet Systems Private Limited, our wholly owned subsidiary in India.
Each unit includes a range of products and services designed to meet the
specific needs of a particular customer segment. Our branch office was
established in order to comply with India tax laws and the India subsidiary was
established in order to gain access to local market.
PRINCIPAL PRODUCTS AND SERVICES
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HYDROMET PRODUCTS DIVISION
The HydroMet Products Division manufactures dataloggers, satellite transmitters/
loggers and sensors. Dataloggers collect sensor data and transmit the data to
central facilities primarily by satellite radio but also by telephone, fiber
optics or microwave. Our sensors support the collection of hydrological and
meteorological data and include a tipping bucket rain gauge, a barometric
pressure sensor, a temperature sensor, and several water level sensors. Our
equipment is compatible with sensors from other companies. We have long-standing
relationships with suppliers for wind speed and wind direction, water quality,
humidity and solar radiation sensors. The principal products that are
manufactured by the HydroMet Products Division are described below.
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8210 DATA LOGGER
The 8210 Data Logger/Transmitter is a simple-to-operate, low-cost data
collection platform which supports a wide variety of telemetry applications. The
8210 is environmentally hardened, capable of operating from -40 C to 60 C,
making it ideal for remote locations. As a data recorder, the 8210 will store
over 65,000 readings in battery-backed memory. The 8210 supports a wide variety
of communications, including radio, satellite, and telephone. The
Telephone/Voice Synthesis option allows communications over standard telephone
circuits using either a synthesized voice message or a modem connected to a
computer terminal.
XPERT AND XLITE DATALOGGERS
The Xpert Datalogger/controller is our next generation datalogger. The Xpert is
also environmentally hardened and capable of operating from -40 C to 60 C. It is
built upon a Microsoft CE operating system, has a 486 microprocessor, C++
programming and standard 2 MB memory that is expandable to over 1 gigabyte. It
has enabled the Company to enter closely related environmental markets such as
oceanic monitoring and airport weather monitoring. The XLite, a derived product
based on the Xpert, does not have a display but is similarly capable. The XLite
was released at the end of 2001.
SATLINK2
In January 2004, the SatLink2 was certified by the National Environmental
Satellite, Data and Information Services (NESDIS). The SatLink2 is a redesign of
the original SatLink transmitter in order to provide the latest features, to
improve functionality and to lower manufacturing costs. The SatLink2 is a high
data rate satellite transmitter/logger that transmits at 100, 300 and 1200 baud,
incorporates GPS and functions as a logger. The SatLink transmitter was
certified by the NESDIS in July 2001 for operation on the Geostationary
Operational Environment Satellite (GOES) system. NESDIS operates two U.S.
Government environmental satellites on this system. All GOES customers are
mandated by NESDIS to purchase high data rate satellite transmitters and to
replace all old 100 baud transmitters within a ten-year period beginning in July
2001. NESDIS made this a requirement in order to increase the amount of data
that the two GOES satellites can handle. SatLink2 is certified on all major
satellite systems around the world and works with virtually all dataloggers.
SatLink2 is programmable from any PC or PDA using software provided with the
unit.
ACCUBAR GAUGE PRESSURE SENSOR
The Accubar Gauge Pressure sensor is used in water level monitoring systems and
is a highly accurate solid state pressure transducer capable of measuring
air/dry gas pressures from 0 to 22 psi with a maximum pressure of 35 psi. It is
housed in an aluminum case and with its low power consumption and low
maintenance requirements, it is ideal for remote monitoring applications.
ACCUBUBBLE SELF-CONTAINED BUBBLER SYSTEM
The AccuBubble Self-Contained Bubbler is a mercury-free and nitrogen-free
bubbler apparatus designed for low maintenance water level measuring. Using the
Sutron Accubar Pressure Sensor as the control and sensing element makes the
AccuBubble a very stable and highly accurate water level measuring device. The
AccuBubble uses power conservation techniques to minimize current consumption.
The bubbler purges the orifice line prior to each measurement. This eliminates
the need for a constant bubble rate, which has been known to consume excessive
power. In addition, the purging sequence prevents debris build up in the orifice
line. The AccuBubble uses an oil-less, non-lubricated piston and cylinder
compressor. This type of compressor is designed to give consistent air delivery
without the use of a diaphragm which can rupture over time. The AccuBubble uses
the SDI-12 communications protocol as the control interface. This allows the
unit to be configured by any data loggers supporting the SDI-12 standard.
TIDES AND PORTS SYSTEMS
The National Ocean Survey (NOS), part of the National Oceanic and Atmospheric
Administration (NOAA), has the responsibility to accurately measure tide levels
around the perimeter of the United States. NOS ensures that measurements are the
most accurate possible by using the best water level instruments available. In
2005 and 2004, the HydroMet Products Division provided state-of-the-art tide
stations to the National Ocean Survey valued at
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approximately $2,374,000 and $900,000. Tide stations are based on the Xpert data
logger and SatLink2. Xperts run the powerful Windows CE multi-tasking operating
system. Sutron has taken advantage of Windows CE to equip each tide station with
software that meets and exceeds all of the NOS requirements. In 2004, we
enhanced the capabilities of tides systems by adding Storm Surge/Tsumani
software. This software provides added capability to tides stations to detect
and provide tsunami warnings.
INTEGRATED SYSTEMS DIVISION
The Integrated Systems Division provides system integration services consisting
of the design and development of customer-specific hardware configurations and
software applications for hydrological and meteorological monitoring and control
systems, the sale of our XConnect database systems software, and long-term
software support for XConnect users. This capability allows us to provide
turnkey hydrological and meteorological systems to a variety of users. Projects
may range in size from one station to hundreds of stations. Projects usually
require design, equipment integration, software application development and
installation and training. Projects can range in duration from several days to
twelve months depending on the scope and complexity of the system.
Airport weather systems, special projects and the India operations are included
in the Integrated Services Division's results. We have contracted with a
seasoned manager with over 20 years experience in the Automatic Weather
Observation System (AWOS) market. Typically, an AWOS includes a sensor suite to
measure wind direction and speed, temperature, relative humidity, precipitation,
and barometric pressure as well as cloud height and horizontal visibility/RVR.
Sensors are connected to a Sutron datalogger, which processes the data, stores
it in a relational database and transmits real-time weather parameters to all
designated users, regardless of location. The system produces weather reports
for aviation and meteorological use, virtually automatically and without need of
human intervention. Special projects are customer funded projects for the
development of specific products or systems. Our India operations consist
primarily of selling hydrological and meteorological monitoring systems.
HYDROLOGICAL SERVICES DIVISION
The Hydrological Services Division provides hydrologic services including data
interpretation and analysis, flow modeling (low flow, rainfall runoff, unsteady
flow routing, water surface profiles), field studies (time of travel, diffusion,
dispersion, calibration of flow control structures, site location), hydrologic
studies (water budget, regression analysis, basin inventory studies),
environmental permitting, legal or expert witness and equipment installation and
maintenance.
SALES AND MARKETING
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We market our products and services both domestically and internationally.
Domestic sales are conducted by our internal sales staff that consists of five
salaried sales personnel who are directly engaged in direct sales activities.
The sales staff is assisted by two other employees in marketing and sales
support functions. Internationally, we have two employees who cover the world
and who work closely with our international sales network that consists of 35
resellers and agents in Canada, Latin and South America, Europe, Africa, Asia
and Australia.
COMPETITION
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We compete in the hydrological, meteorological and oceanic monitoring markets
and are aware of both domestic and foreign competitors who offer products,
systems, and services of their own as well as companies that are systems
integrators who primarily offer real-time networks from components manufactured
by others. We are aware of numerous firms, ranging in size, that offer
competitive dataloggers, high data rate satellite transmitters, sensors and
other instruments and software.
Several of these companies have financial, research and development, marketing,
management and technical resources substantially greater than ours. We may also
be at a competitive disadvantage because we purchase certain sensors and other
equipment components, as well as computer hardware and peripheral equipment,
from manufacturers who are or may become competitors with respect to one or more
of our products.
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With respect to our professional engineering and technical services, we are in
competition with numerous diverse engineering and consulting firms, many of
which have larger staffs and facilities, and are better known, have greater
financial resources, and have more experience. As to hydrological services, we
are aware that many firms offer maintenance services; some of these companies
have larger staffs, are better equipped, and have greater financial, marketing
and management resources. Price, features, product quality, promptness of
delivery, customer service and performance are believed to be the primary
competitive factors with respect to all of our products and services.
CUSTOMERS
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During 2005, approximately 44% of our products and services were sold to the
Federal Government. Net sales and revenues in 2005 among the various agencies
were as follows: Department of the Interior, 22%; Department of Commerce, 16%,
Department of Defense, 4% and other agencies of the federal government, 2%. The
revenues from the Department of the Interior were among the U.S. Geological
Survey and the Bureau of Reclamation. Approximately all revenues with the
Department of Commerce were from sales of tides systems to NOS.
We also performed on various contracts of foreign origin. Total revenues from
foreign customers amounted to approximately 25% of total revenues in 2005, 32%
of total revenues in 2004 and 28% in 2003.
RESEARCH AND DEVELOPMENT
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During the three years ended December 31, 2005, 2004, and 2003, we incurred
expenses of approximately $1,321,591, $1,018,874 and $1,065,559 respectively, on
activities relating to the development of new products and the improvement of
existing products.
In 2005, our product development focus was on the development of a stage
discharge recorder, improvement of the SatLink2 user interface software and
continual improvement of our water level sensors. The stage discharge recorder
is an ultra-reliable SDI-12 optical encoder fused with logger technology from
our state-of-the art SatLink2 transmitter/logger to create an encoder that never
forgets due to data being saved in flash memory and uses proven
float-tape-counterweight technology. All setup is done from the front panel of
the encoder, and download utilities are available for Pocket PC compatible PDAs
and Windows laptops.
PATENTS, TRADEMARKS, COPYRIGHTS AND AGREEMENTS
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Although we do not deem patent protection to be of significant importance to our
industry, we have and may in the future seek patents for certain products,
real-time networks, and technology as well as software products, real-time
networks, and technology. Our software products and innovations may not be
patentable but may be subject to automatic but limited copyright protection. We
treat our products, real-time networks, technology and software as proprietary
and rely on trade secret laws and internal non-disclosure safeguards rather than
making our designs and processes generally available to the public by applying
for patents.
Further, we believe that, because of the rapid pace of technological change in
the computer, electronics and telecommunications industries, patent and
copyright protection is of less significance than factors such as the knowledge
and experience of our personnel and their ability to design and develop enhanced
and new products, real-time networks and their components.
MANUFACTURING
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Our manufacturing operations consist of materials planning and procurement,
final assembly, product assurance testing, quality control, and packaging and
shipping. We currently use several independent manufacturers to provide certain
printed circuit boards, chassis and subassemblies. We believe that the
efficiency of our manufacturing process to date is largely due to our product
architecture and our commitment to manufacturing process design. We have spent
significant engineering resources producing customized software to assure
consistent high product quality. Products are tested after the assembly process
using internally developed automated product assurance testing procedures.
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Our products use certain components, such as microprocessors, memory chips and
pre-formed enclosures that are acquired or available from one or a limited
number of sources. We have generally been able to procure adequate supplies of
these components in a timely manner from existing sources. While most components
are standard items, certain application-specific integrated circuit chips used
in many of our products are customized to our specifications. None of the
suppliers of components operate under contract. Additionally, availability of
some standard components may be affected by market shortages and allocations.
Our inability to obtain a sufficient quantity of components when required or to
develop alternative sources at acceptable prices and within a reasonable time,
could result in delays or reductions in product shipments which could materially
affect our operating results in any given period. In addition, as referenced
above, we rely heavily on outsourcing subcontractors for production. The
inability of such subcontractors to deliver products in a timely fashion or in
accordance with our quality standards could materially affect our operating
results and business.
We received an ISO 9001 certification on March 12, 1999 and an ISO 9001:2000
certification on August 13, 2003. We continued to be certified during fiscal
year 2005.
GOVERNMENT REGULATION
---------------------
We manufacture some of our products and provide some of our services under
contracts with the United States government. We manufacture other products under
contracts with private third parties who utilize our products to satisfy United
States government contracts to which they are a party. Federal acquisition
regulations and other federal regulations govern these relationships. Some of
these regulations relate specifically to the seller-purchaser relationship with
the government (which may exist on our own account, or that of one or more of
our clients), such as the bidding and pricing rules. Under regulations of this
type, we must observe pricing restrictions, produce and maintain detailed
accounting data, and meet various other requirements.
Other regulations relate to the conduct of our business generally, such as
regulations and standards established by the Occupational Safety and Health Act
or similar state laws and relating to employee health and safety. In particular,
regulations governing these contracts require that we comply with federal laws
and regulations, in general, or face civil liability, cancellation or suspension
of existing contracts, or ineligibility for future contracts or subcontracts
funded in whole or in part with federal funds. In addition, loss of governmental
certification (affirming that we are eligible to participate on government
contracted work) could cause some of our customers to reduce or cease making
purchases from us, which would adversely impact our business.
FOREIGN OPERATIONS
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We opened a branch office in New Delhi, India in December 2004. The branch
office was established in order to comply with India tax law. The Advance Tax
Court of India determined that we had a Permanent Establishment in India as a
result of the employment of a full-time Country Manager. The branch office can
perform sales and marketing and installation and maintenance activities but is
restricted from bidding on domestic Indian tenders. We began the process of
forming a wholly owned subsidiary in India in 2004 in order to bid on domestic
India tenders. Formal approval of the wholly owned subsidiary was given in
February 2005.
EMPLOYEES
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As of December 31, 2005, we and our wholly owned subsidiary had a total of 71
employees, of which 70 were full time. We also from time to time employ
part-time employees and hires independent contractors. Our employees are not
represented by any collective bargaining agreement and we have never experienced
a work stoppage. We believe that our employee relations are good.
BACKLOG
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At December 31, 2005, our backlog was $10,839,778 as compared with $5,620,968 at
December 31, 2004. We anticipate that 72% of our 2005 year-end backlog will be
shipped in 2006.
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ITEM 2 - PROPERTIES
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Our corporate headquarters are located at 21300 Ridgetop Circle, Sterling,
Virginia. We lease this 17,000 square foot facility and it contains our
administrative offices, sales and marketing offices and manufacturing
facilities. The lease expires in March 2009. We lease an additional 7,000 square
feet of space in Sterling, Virginia for our Research and Development group and
Integrated Services Division. The lease for this facility expires in March 2009
as well. We lease 5300 square feet of office and warehouse space in West Palm
Beach, Florida. The four-year lease expires in August 2008. The Hydrological
Services division uses this space which consists of both office and warehouse
space. The Hydrological Services Division also occupies 1500 square feet of
leased office space in Brandon, Florida. The lease expires in December 2008.
This space is used for sales and marketing and engineering offices. We entered
into a lease agreement for approximately 1800 square feet of office space in New
Delhi, India in September 2004. The lease is month to month. The India branch
office and wholly owned subsidiary use this space for offices. We believe that
our facilities are adequate for our present needs and that our properties are in
good condition, well maintained and adequately insured.
ITEM 3 - LEGAL PROCEEDINGS
--------------------------
Various legal claims can arise from time to time in the normal course of
business which, in the opinion of management, will have no material effect on
our financial statements. We have been named in a compensation claim under the
Indian Anti-Trust Law that is pending before The Monopolies and Restrictive
Trade Practices Commission in New Delhi, India. Management believes that the
case is unsubstantiated and intends to vigorously defend itself.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matter was submitted to a vote of security holders in the fourth quarter of
2005.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
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SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
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MARKET INFORMATION
Our common stock, $.01 par value, was traded on the OTC Bulletin Board under the
symbol "STRN.OB" until October 2005. Our common stock began trading on the
Nasdaq Capital Market (formerly the Nasdaq SmallCap Market) under the symbol
"STRN" on October 25, 2005. The table below sets forth the high and low sales
for the periods shown.
FISCAL YEAR ENDED DECEMBER 31, 2004 HIGH LOW
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First Quarter $ 1.70 $ .65
Second Quarter $ 3.75 $ 1.25
Third Quarter $ 4.50 $ 2.80
Fourth Quarter $ 12.00 $ 3.90
FISCAL YEAR ENDED DECEMBER 31, 2005
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First Quarter $ 10.00 $ 5.40
Second Quarter $ 6.65 $ 5.25
Third Quarter $ 8.14 $ 5.50
Fourth Quarter $ 9.00 $ 5.45
The closing price of the Common Stock on March 24, 2006 was $8.10, and on that
date, there were approximately 825 stockholders of record.
DIVIDENDS
We have never declared or paid a dividend on our common stock. We intend to
retain future earnings to fund development and growth of our business.
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RECENT SALES OF UNREGISTERED SECURITIES
There were no issuances of unregistered securities in fiscal 2005 that have not
been reported previously in a quarterly report on Form 10-QSB or a current
report on Form 8-K.
ISSUER PURCHASES OF EQUITY SECURITIES
No purchases of Sutron equity securities were made by or on behalf of Sutron in
the fourth quarter of our fiscal year ended December 31, 2005.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes the securities authorized for issuance under
equity compensation plans as of December 31, 2005:
NUMBER OF WEIGHTED
SECURITIES TO BE AVERAGE
ISSUED UPON EXERCISE PRICE NUMBER OF
EXERCISE OF OF OUTSTANDING SECURITIES
OUTSTANDING OPTIONS, REMAINING
OPTIONS, WARRANTS WARRANTS AND AVAILABLE FOR
AND RIGHTS RIGHTS FUTURE ISSUANCE
----------------- -------------- -----------------
Equity compensation plans approved
by stockholders -- -- --
Equity compensation plans not
approved by stockholders 739,333 $.98 225,667
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Total 739,333 $.98 225,667
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ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS, WHICH REFLECT THE
CURRENT VIEWS OF THE COMPANY WITH RESPECT TO FUTURE EVENTS THAT COULD HAVE AN
EFFECT ON ITS FUTURE FINANCIAL PERFORMANCE. THESE STATEMENTS MAY INCLUDE SUCH
WORDS AS "EXPECTS," "BELIEVES," "ESTIMATES," AND SIMILAR EXPRESSIONS. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE
CURRENTLY ANTICIPATED. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
THESE FORWARD-LOOKING STATEMENTS.
BACKGROUND AND OVERVIEW
Our primary focus is to provide real-time systems solutions, including equipment
and software, and services to our customers in the areas of hydrological
monitoring and control, meteorological monitoring including airport weather
systems, oceanic monitoring and control systems and hydrological services. We
design, manufacture and market these products and services to a diversified
customer base consisting of federal, state, local and foreign governments,
engineering companies, universities, and hydropower companies. Our products and
services enable these entities to monitor and collect hydrological,
meteorological and oceanic data for the management of critical water resources,
for early warning of potentially disastrous floods, storms or tsunamis, for the
optimization of hydropower plants and for providing real-time weather conditions
at airports.
Our key products are our SatLink2 Transmitter/Logger, our Xpert and XLite
dataloggers, our water level sensors and our XConnect systems software. These
are the essential components of most systems and are provided to customers as
off-the-shelf pieces of equipment or as part of a custom system. The SatLink2 is
a key product because it functions both as a transmitter and also as a
datalogger. It is an excellent solution for small systems that do not require a
significant number of sensors or communications options. The Xpert and XLite are
more powerful dataloggers that have significant more logging capability and
communications options than the SatLink2.
Net sale and revenues from hydrological services has grown steadily since the
establishment of our Hydrological Services Division in 2001. The principal
customer of this division has been the South Florida Water Management
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District (SFWMD) which is a regional agency of the state of Florida that is
charged with managing and protecting water resources in a 16 county area. We
provide a variety of services to SFWMD including flood and stormwater
management, river and stream analysis, equipment installation and maintenance
and modeling.
We are committed in our ongoing sales, marketing and research and development
activities to sustain and grow our sales and revenues from our products and
services. In 2006, we expect to derive a significant amount of our revenues from
systems to be installed in India that were awarded late in 2005 and we are
committed to expanding our airport weather systems and our hydrological
services. We are beginning fiscal year 2006 with a significantly higher backlog
of $10,839,778 as compared to beginning fiscal year 2005 with a backlog of
$5,620,968 that is primarily due to the India awards. We anticipate moderate
growth in net sales and revenues in 2006 due to increased concern over the
management of vital water resources and increased governmental efforts to
provide earlier warnings of flooding, storms and tsunamis.
In 2006, we anticipate that we will continue to experience significant quarterly
fluctuations in our net sales and revenues. Operating results will depend upon
the product mix and upon the timing of project awards. Export sales, which
totaled 25% of net sales and revenues for 2005, constitute a significant portion
of our net sales and revenues but are difficult to project. We expect our sales
and marketing, research and development and general and administrative expenses
to increase moderately in 2006 as compared to 2005.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of financial condition and results of operations is
based upon the consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We
evaluate, on an on-going basis, our estimates and judgments, including those
related to bad debts, excess and obsolete inventories, warranty obligations,
income taxes, contingencies and litigation. Our estimates are based on
historical experience and assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies, among others, affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements.
o Revenue recognition;
o Allowance for doubtful accounts;
o Allowances for excess and obsolete inventories;
o Accounting for warranty obligations;
o Accounting for income taxes;
o Accounting and valuation of stock option compensation.
REVENUE RECOGNITION - Our revenue recognition policy is consistent with the
requirements of Staff Accounting Bulletin No. 101 (SAB 101), "Revenue
Recognition in Financial Statements," Statement of Position No. 97-2 (SOP 97-2),
"Software Revenue Recognition," and other applicable revenue recognition
guidance and interpretations. In general, we record revenue when it is realized,
or realizable, and earned. We consider these requirements met when persuasive
evidence of an arrangement exists, the products or services have been provided
to the customer, the sales price is fixed or determinable and collectibility is
reasonably assured. Our revenue reflects reductions attributable to discounts
and customer returns.
For our products, consisting of both equipment and software, revenue is
recognized upon shipment, delivery, installation or customer acceptance of the
product, as agreed in the customer order or contract. We do sell our software
products without the related equipment although software products are integral
to systems. Our typical system requires no significant production, modification
or customization of the software or hardware. For complex systems, revenue is
deferred until customer acceptance. We do provide customer discounts and do
allow for
Page 11
product returns. We do not do consignment sales or bill and hold. Revenue
reflects reductions due to discounts and product returns. Product returns have
historically been insignificant in amount.
Our sales arrangements for systems often include services in addition to
equipment and software. These services could include equipment integration,
software customization, installation, maintenance, training, and customer
support. For sales arrangements that include bundled hardware, software and
services, we account for any undelivered service offering as a separate element
of a multiple-element arrangement. Amounts allocated to each element are based
on its objectively determined fair value, such as the sales price for the
product or service when it is sold separately. Revenue for these services is
typically recognized ratably over the period benefited or when the services are
complete.
We use the percentage of completion method for recognizing revenue and profits
when it performs on fixed price contracts that extend over a number of years.
Under the percentage of completion method, revenue and profits are recorded as
costs are incurred based on estimates of total sales value and costs at
completion where total profit can be estimated with reasonable accuracy and
ultimate realization is reasonably assured. Profit estimates are revised
periodically based upon changes and facts, and any losses on contracts are
recognized immediately. Contracts may contain provisions to earn incentive and
award fees if targets are achieved. Incentive and award fees that can be
reasonably estimated are recorded over the performance period of the contract.
Incentive and award fees that cannot be reasonably estimated are recorded when
awarded. We recognize revenue from time-and-materials contracts to the extent of
billable rates, times hours delivered, plus direct materials costs incurred.
Some of the contracts include provisions to withhold a portion of the contract
value as retainage. Our policy is to take into revenue the full value of the
contract, including any retainage, as it performs against the contract.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - Accounts receivable arise from the normal
course of selling products on credit to customers. An allowance for doubtful
accounts has been provided for estimated uncollectable accounts. Accounts
receivable balances, historical bad debts, customer concentrations, customer
creditworthiness, current economic trends and changes in customer payment terms
and practices are analyzed when evaluating the adequacy of the allowance for
doubtful accounts. Individual accounts are charged against the allowance when
collection efforts have been exhausted.
INVENTORY VALUATION - Our inventories are stated at the lower of cost or market.
We provide allowances on inventories for any material that has become obsolete
or may become unsaleable based on estimates of future demand and sale price in
the market. Judgments with respect to saleability and usage of inventories,
estimated market value, and recoverability upon sale are complex and subjective.
Such assumptions are reviewed periodically and adjustments are made, as
necessary, to reflect changed conditions.
WARRANTY OBLIGATIONS - We warranty our products for up to two years and
estimated warranty costs are based upon management's best estimate of the
amounts necessary to settle future and existing claims on equipment sold as of
the balance sheet date. Factors considered include actual past experience of
product returns and the related estimated cost of labor and material to make the
necessary repairs as well as technological advances and enhanced design and
manufacturing processes. If actual future product return rates or the actual
costs of material and labor differ from the estimates, adjustments to the
accrued warranty liability are made.
INCOME TAXES - We are taxed as a domestic U.S. corporation under the Internal
Revenue Code. Deferred income tax assets and liabilities are recognized for the
expected future tax consequences of events that have been included in the
consolidated financial statements or tax returns. Deferred income tax assets and
liabilities are determined based on the differences between the financial
statement and tax basis of assets and liabilities using currently enacted tax
rates in effect for the years in which the differences are expected to reverse.
Deferred tax assets are evaluated and a valuation allowance is established if it
is more likely than not that all or a portion of the tax asset will not be
utilized.
STOCK OPTION COMPENSATION - We account for our stock-based employee compensation
plan in accordance with the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," whereby the difference
between the exercise price and the fair market value on the date of grant is
recognized as compensation expense. Under the intrinsic value method of
accounting, no compensation expense is recognized in our consolidated statement
of operations when the exercise price of the employee/director stock option and
warrant
Page 12
grants equals the market price of the underlying common stock on the date of
grant, and the measurement date of the option or warrant grant is certain. The
measurement date is certain when the date of grant is fixed and determinable.
Compensation cost for employee/director stock options and warrants is measured
as the excess, if any, of the quoted market price of our stock at the date of
grant over the amount that the employee/director is required to pay for the
stock. Options and warrants to non-employees are accounted for as required by
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." This Statement, for small business issuers is
effective as of the beginning of the Company's next fiscal year. Accordingly, we
will adopt SFAS 123(R) in the first quarter of fiscal 2006. We expect it to have
a material impact on our financial statements during the fiscal year 2006 and
thereafter.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, certain income
statement data of the Company expressed as a percentage of revenues:
Year Ended December 31,
2005 2004 2003
------ ------ ------
Net sales and revenues 100.0% 100.0% 100.0%
Cost of sales and revenues 59.1 61.5 69.5
------ ------ ------
Gross profit 40.9 38.5 30.5
Selling, general and administrative expenses 18.1 14.4 20.1
Research and Development expenses 8.5 6.1 9.7
------ ------ ------
Operating income 14.3 18.0 .7
------ ------ ------
Interest (income) expense (.1) .1 .3
------ ------ ------
Income before income taxes 14.4 17.9 .4
Income taxes (benefit) 4.9 6.5 (.5)
------ ------ ------
Net income 9.5% 11.4% .9%
====== ====== ======
FISCAL 2005 COMPARED TO FISCAL 2004
NET SALES AND REVENUES
Our net sales and revenues for 2005 decreased 7.5% to $15.4 million from $16.7
million in 2004, primarily as a result of a decrease in export sales of standard
products in our HydroMet Products Division. Our revenues are broken down between
our principal operating divisions or profit centers which include the HydroMet
Products Division, the Integrated Services Division, which includes special
projects, airport weather systems and our India operations, and the Hydrological
Services Division. The HydroMet Products Division, which is responsible for
sales of standard products, had a revenue decrease of 12.9% to $9.3 million from
$10.7 million in 2004. In 2004, we shipped approximately $2.4 million of
dataloggers and sensors to a Canadian consortium for a flood warning project in
Poland. We also shipped approximately $1.3 million FMQ-13(v)2 Wind Sensor
systems to Hanscom Air Force Base. The decrease in project shipments was
partially offset by increased shipments of NOS tides systems. Integrated Systems
revenues decreased 3.9% to $3.5 million from $3.6 million in 2004 due to a
decrease in project deliveries. Revenues from the Hydrological Services Division
increased to $2.6 million from $2.4 million in 2004 due to increased activity in
Florida.
Domestic net sales and revenues increased in 2005 to $11.6 million from $11.3
million in 2004, an increase of 2.6%. Net sales and revenues from standard
products increased to $7.5 million in 2005 from $6.96 million in 2004. This
increase was primarily due to increased sales of NOS tides systems which
increased to approximately $2.4 million from approximately $900,000 in 2004 and
increased sales of SatLink2 transmitters/loggers. These increases offset
decreased revenues from deliveries of FMQ-13(v)2 Wind Sensor systems to Hanscom
Air Force Base in 2004 that totaled approximately $1.3 million. Net sales and
revenues from Integrated Systems decreased to $1.45 million
Page 13
compared to $1.95 million in 2004 primarily due to decreased project activity.
Net sales and revenues from hydrological services increased to $2.6 million from
$2.4 million in 2004 due to the expansion of operations in Florida.
International net sales and revenues decreased 29% to $3.8 million in 2005 from
$5.4 million in 2004. Net sales and revenues from standard products decreased to
$1.8 million from $3.7 million in 2004 due to decreased project shipments. In
2004, we shipped approximately $2.4 million of dataloggers and sensors to a
Canadian consortium for a flood warning project in Poland. This was a
significant project but was partially offset in 2005 by revenues from new
international project shipments. Net sales and revenues from Integrated Systems
increased to $2.0 million from $1.7 million due primarily to increased revenues
from projects and operations in India. We were awarded two contracts from
customers in India in the fourth quarter of 2005 that totaled approximately
$6,067,600. We had projected receiving both awards earlier in 2005 which, if
that had occurred, would have improved the 2005 twelve month operating results.
The timing of both contract awards, however, was in late 2005 and we expect 2006
results to benefit from the increased backlog.
Our largest customer in each of years 2005 and 2004 was the Department of the
Interior, the principal agencies being the US Geological Survey and the Bureau
of Reclamation, which accounted for 22% and 20% of revenues, respectively.
Non-federal government, commercial and international revenues represented 56% of
revenues in 2005 and in 2004.
COST OF SALES AND REVENUES
Cost of sales as a percentage of revenues was 59.1% for 2005 as compared to
61.5% for 2004. The decrease in cost of sales reflects improvements in
manufacturing efficiencies as well as changes in the product mix. In 2005, we
had a full year of sales of the SatLink2 transmitter/logger as compared to
approximately seven months of sales in 2004. SatLink was redesigned to add
features and reduce costs and the SatLink2, its replacement, was certified by
NESDIS in January 2004. The SatLink2 has significantly reduced material costs,
subcontract assembly costs and final assembly and testing labor costs. The
increase in sales of NOS tides systems also contributed to reduce cost of sales
as we was able to purchase materials in greater quantities and improve labor
efficiency via larger production runs. Cost of sales for both 2005 and 2004
include provisions for inventory obsolescence, physical inventory adjustments
and inventory valuation adjustments. We continually pursues product cost
reductions through continual review of procurement sourcing based on quality and
cost goals, product value engineering and improvements in manufacturing
processes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $2.8 million in 2005 as
compared with $2.4 million in 2004. Selling, general and administrative expenses
as a percentage of revenues increased to 18.1% in 2005 from 14.4% in 2004. The
increase was due primarily to increased costs associated with sales and
marketing efforts of our India operations, increased legal costs associated with
compliance requirements, increased insurance costs for directors and officers'
coverage and increased stock exchange fees associated with our listing on the
Nasdaq Capital Market.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 30% to $1.3 million in 2005 from $1
million in 2004. Research and development expenses as a percentage of revenues
decreased to 8.6% in 2005 from 6.1% in 2004. In 2004, engineers worked directly
on certain contracts including the Hanscom Air Force Base AN-FMQ-13(V)2 Wind
Sensor System resulting in significant engineering costs being included in cost
of sales.
In 2005, our product development focus was on the development of a stage
discharge recorder, improvement of the SatLink2 user interface software and
continual improvement of our water level sensors. The stage discharge recorder
is an ultra-reliable SDI-12 optical encoder fused with logger technology from
our state-of-the art SatLink2 transmitter/logger to create an encoder that never
forgets due to data being saved in flash memory and uses proven
float-tape-counterweight technology. All setup is done from the front panel of
the encoder, and download utilities are available for Pocket PC compatible PDAs
and Windows laptops.
Page 14
INTEREST INCOME AND EXPENSE, NET
We earned net interest income of $22,708 in 2005 as compared with net interest
expenses of $30,411 in 2004. Lower levels of debt combined with higher cash and
cash equivalent balances were responsible for the net interest income.
INCOME TAXES
Income tax expense for 2005 was $755,000 compared to $1,078,000 for 2004. The
provision for income taxes for 2005 represents an effective tax rate of
approximately 34% compared with 36% for 2004. The decrease is primarily due to
an increase in research and development and manufacturer tax credits that offset
income taxes.
FISCAL 2004 COMPARED TO FISCAL 2003
NET SALES AND REVENUES
Our net sales and revenues for 2004 increased 51% to $16.7 million from $11
million in 2003. Domestic net sales and revenues increased in 2004 to $11.3
million from $7.9 million in 2003, an increase of 42%. Standard products sales
increased to $6.96 million in 2004 from $5.65 million in 2003. Net sales and
revenues from integrated systems increased significantly to $1.95 million
compared to $1.3 million in 2003 primarily due to increased software services
projects and engineering services provided to Hanscom Air Force Base to develop
the AN-FMQ-13(v)2 wind sensor system. Net sales and revenues for hydrological
services increased to $2.36 million from $1 million in 2003 due to the expansion
of operations in Florida.
International net sales and revenues increased 74% to $5.4 million in 2004 from
$3.1 million in 2003. Standard products net sales and revenues increased to
$3.73 million from $944,000 in 2003 due to our providing dataloggers, sensors
and other equipment totaling $2.4 million to a Canadian consortium for a flow
monitoring and flood warning system in Poland. Net sales and revenues from
integrated systems decreased to $1.7 million from $2.0 million due to fewer
international systems projects.
Our largest customer in each of years 2004 and 2003 was the Department of the
Interior, the principal agencies being the US Geological Survey and the Bureau
of Reclamation, which accounted for 20% and 28% of revenues, respectively.
Non-federal government, commercial and international revenues represented 56% of
revenues in 2003 versus 55% in 2002.
COST OF SALES AND REVENUES
Cost of sales as a percentage of revenues was 61.5% for 2004 as compared to
69.5% for 2003. Cost of sales decreased in 2004 due to the increase in revenues
and due to improvements in the design and manufacturability of the SatLink2
Satellite Transmitter/Logger. We certified the Satlink2 in January 2004 and
began shipping units in May 2004. The SatLink2 was designed to have fewer parts,
improved manufacturability and improved features compared to the SatLink. We
also benefited from large project awards with Hanscom Air Force Base and a
Canadian consortium for a flow monitoring and flood warning system in Poland.
Both contracts required significant quantities that allowed us to obtain
supplier pricing discounts that greatly improved margins. Our gross margin is
dependent on product volumes, product mix, overhead expenses and projects that
vary in terms of size, complexity and pricing competitiveness. All of these
factors fluctuate from year to year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $2.4 million in 2004 as
compared with $2.2 million in 2003. Selling, general and administrative expenses
as a percentage of revenues decreased to 14.4 in 2004 from 20.1% in 2003 due to
the increase in revenues.
Page 15
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased 4% to $1.02 million in 2004 from
$1.06 million in 2003. Research and development expenses as a percentage of
revenues decreased to 6.1% in 2004 from 9.7% in 2003. In 2004, engineers worked
directly on certain contracts including the Hanscom Air Force Base AN-FMQ-13(V)2
Wind Sensor System resulting in engineering costs being included in cost of
sales.
In 2004, our product development focus was on continual improvement of the
SatLink2 and other core products. We certified the SatLink2 to operate on Chinas
environmental satellite, FY-2C. We expect China to be a significant market. We
also worked towards certification of a 40 Watt SatLink2 Satellite
Transmitter/Logger that can be installed on existing and new ocean system buoys
to send ocean and weather parameters including tsunami warnings through the
global geostationary satellite systems in near real-time. Certification of the
40-Watt SatLink2 Satellite Transmitter/Logger was received from NESDIS in March
2005. We also continued its development efforts in 2004 relating to tides
monitoring systems by adding Storm Surge/Tsunami software. Tides systems are
based on the Xpert datalogger and the SatLink2 transmitter. We received orders
for tides systems totaling $900,000 in 2004 and $676,000 in 2003.
INTEREST EXPENSE, NET
Other income and expenses consisted of interest expenses of $30,411 in 2004 and
$29,778 in 2003.
INCOME TAXES
Income tax expense for 2004 was $1,078,000 compared to an income tax benefit of
$52,000 for 2003. The provision for income taxes for 2004 represents an
effective tax rate of approximately 36%. The increase is primarily due to our
increased profitability.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents was $1,861,627 at December 31, 2005 compared to
$1,419,171 at December 31, 2004. Working capital increased to $6.84 million at
December 31, 2005 compared with $5.35 million at December 31, 2004. The increase
resulted from the earnings in 2005.
Net cash provided by operating activities was $840,634 for the year ended
December 31, 2005 as compared to cash provided by operating activities of
$2,133,859 for the year ended December 31, 2004 and cash used by operations of
$526,355 for the year ended December 31, 2003. The decrease was due to lower net
income, to an increase in deferred taxes and to a decrease in accrued expenses.
Net cash provided by investing activities was $47,034 for the year ended
December 31, 2005, compared to cash used by investing activities of $322,277 and
$434,437 for the years ended December 31, 2004 and 2003. The increase in 2005
resulted from an increase in restricted cash, which is cash used for bid
securities, that was offset primarily by purchases of property and equipment.
The decreases in 2004 and 2003 were due primarily due to purchases of property
and equipment.
Net cash used by financing activities was $53,370 for the year ended December
31, 2005 due primarily to payments on term notes. Net cash used by financing
activities was $893,740 for the year ended December 31, 2004 due to payments on
the line of credit and on shareholder and term notes. Net cash provided by
financing activities was $670,210 for the year ended December 31, 2003 due to
proceeds from the line of credit, term notes and shareholder notes.
We have a revolving credit facility of $2,000,000 with BB&T Bank. We are
permitted to borrow based on accounts receivable and inventory according to
pre-established criteria. The credit facility expires on August 5, 2006 and is
secured by substantially all assets of the Company. Borrowings bear interest at
the bank's prime rate plus one-half. During 2005, there were no borrowings on
the line of credit. We frequently bid on and enter into international contracts
that require bid and performance bonds. At December 31, 2005 and 2004, a
commercial bank had issued
Page 16
standby letters of credit in the amount of $751,725 and $186,354 that served as
either bid or performance bonds. The amount available to borrow under the line
of credit was reduced by these amounts.
Management believes that its existing cash resources, cash flow from operations
and short-term borrowings on the existing credit line will provide adequate
resources for supporting operations during fiscal 2006. Although there can be no
assurance that our revolving credit facility will be renewed, management
believes that, if needed, it would be able to find alternative sources of funds
on commercially acceptable terms.
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In December 2004, the FASB issued SFAS No. 123(R), SHARE-BASED PAYMENT. This
statement revises FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION and supersedes APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. SFAS No. 123(R) focuses primarily on the accounting for transactions
in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires companies to recognize in the statement
of operations the cost of employee services received in exchange for awards of
equity instruments based on the grant-date fair value of those awards (with
limited exceptions). This Statement, for small business issuers is effective as
of the beginning of our next fiscal year. Accordingly, we will adopt SFAS 123(R)
in its first quarter of fiscal 2006. The impact of this new standard, if it had
been in effect, on the net income and related per share amounts for the year
ended December 31, 2005 is disclosed in Note 1 - Stock Based Compensation. It is
expected to have a material impact on our financial statements during the fiscal
year 2006 and thereafter.
In May 2005, the FASB issued SFAS 154, ACCOUNTING CHANGES AND ERROR CORRECTIONS.
This new standard replaces APB Opinion 20, ACCOUNTING CHANGES and SFAS 3,
REPORTING ACCOUNTING CHANGES IN INTERIM FINANCIAL STATEMENTS. Among other
changes, SFAS 154 requires that a voluntary change in accounting principle be
applied retrospectively with all prior period financial statements presented on
the new accounting principle, unless it is impracticable to do so. SFAS 154 also
provides that a change in method of depreciating or amortizing a long-lived
non-financial asset be accounted for as a change in estimate (prospectively)
that was effected by a change in accounting principle, and that corrections of
previously issued financial statements should be termed a RESTATEMENT. The new
standard is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. Adoption of this standard is not
expected to have a material impact on our financial position or results of
operations.
Page 17
ITEM 7 - FINANCIAL STATEMENTS
-----------------------------
SUTRON CORPORTION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm 19
Consolidated Balance Sheets at December 31, 2005 and 2004 20
Consolidated Statements of Operations for the Years ended
December 31, 2005, 2004 and 2003 21
Consolidated Statements of Changes in Stockholders' Equity
for the Years ended December 31, 2005, 2004 and 2003 22
Consolidated Statements of Cash Flows for the Years ended
December 31, 2005, 2004 and 2003 23
Notes to Consolidated Financial Statements 24
Page 18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Sutron Corporation
We have audited the accompanying consolidated balance sheets of Sutron
Corporation and subsidiary as of December 31, 2005 and 2004, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2005. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 Sutron Corporation and
subsidiary as of December 31, 2005 and 2004, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2005, in conformity with U.S. generally accepted accounting principles.
/s/ Thompson, Greenspon & Co., P.C.
-----------------------------------
February 24, 2006
Fairfax, Virginia
Page 19
SUTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2005 2004
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,861,627 $ 1,033,149
Restricted cash and cash equivalents 233,375 386,022
Accounts receivable 3,711,426 3,755,439
Inventory 2,532,524 2,371,476
Prepaid items and other assets 493,947 270,014
Deferred income taxes 278,000 179,000
----------- -----------
Total current assets 9,110,899 7,995,100
PROPERTY AND EQUIPMENT, AT COST 3,222,086 3,038,168
Less: Accumulated depreciation and amortization (2,534,854) (2,328,496)
----------- -----------
Property and equipment, net 687,232 709,672
OTHER ASSETS 48,623 51,133
----------- -----------
TOTAL ASSETS $ 9,846,754 $ 8,755,905
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 844,511 $ 943,616
Accrued payroll 195,153 272,601
Other accrued expenses 1,179,925 1,400,779
Notes payable - current 47,663 25,613
----------- -----------
Total current liabilities 2,267,252 2,642,609
LONG-TERM LIABILITIES
Notes payable, net of current maturities 88,773 89,666
Deferred income taxes 169,000 172,000
----------- -----------
TOTAL LIABILITIES 2,525,025 2,904,275
----------- -----------
STOCKHOLDERS' EQUITY
Common stock 42,946 42,896
Additional paid-in capital 2,312,230 2,306,655
Retained earnings 4,968,224 3,497,930
Accumulated other comprehensive (loss) income (1,671) 4,149
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 7,321,729 5,851,630
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,846,754 $ 8,755,905
=========== ===========
See accompanying notes to consolidated financial statements.
Page 20
SUTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
2005 2004 2003
------------ ------------ ------------
Net sales and revenues $ 15,434,255 $ 16,678,889 $ 11,015,689
Cost of sales and revenues 9,115,574 10,252,952 7,658,887
------------ ------------ ------------
Gross profit 6,318,681 6,425,937 3,356,802
------------ ------------ ------------
Operating expenses:
Selling, general and administrative expenses 2,794,504 2,396,690 2,218,450
Research and development expenses 1,321,591 1,018,874 1,065,559
------------ ------------ ------------
Total operating expenses 4,116,095 3,415,564 3,284,009
------------ ------------ ------------
Operating income 2,202,586 3,010,373 72,793
Interest income (expense), net 22,708 (30,411) (29,778)
------------ ------------ ------------
Income before income taxes 2,225,294 2,979,962 43,015
Income tax (expense) benefit (755,000) (1,078,000) 52,000
------------ ------------ ------------
Net income $ 1,470,294 $ 1,901,962 $ 95,015
============ ============ ============
Net income per share:
Basic income per share $ .34 $ .44 $ .02
------------ ------------ ------------
Diluted income per share $ .30 $ .38 $ .02
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
Page 21
SUTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
Accumulated
Additional Other
Common Stock Paid-In Retained Comprehensive
Shares Par Value Capital Earnings Income (Loss) Total
----------- ----------- ----------- ---------- ----------- -----------
Balances, December 31,
2002 4,289,551 $ 42,896 $ 2,306,655 $ 1,500,953 $ -- $ 3,850,504
Net income -- -- -- 95,015 -- 95,015
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31,
2003 4,289,551 42,896 2,306,655 1,595,968 -- 3,945,519
-----------
Comprehensive income:
Net income -- -- -- 1,901,962 -- 1,901,962
Cumulative translation
adjustment -- -- -- -- 4,149 4,149
-----------
Total comprehensive
income 1,906,111
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31,
2004 4,289,551 42,896 2,306,655 3,497,930 4,149 5,851,630
-----------
Comprehensive income:
Net income -- -- -- 1,470,294 -- 1,470,294
Cumulative translation
adjustment -- -- -- -- (5,820) (5,820)
-----------
Total comprehensive
income 1,464,474
-----------
Stock options exercised 5,000 50 5,575 -- -- 5,625
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31,
2005 4,294,551 $ 42,946 $ 2,312,230 $ 4,968,224 $ (1,671) $ 7,321,729
=========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
Page 22
SUTRON CORPORTION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
2005 2004 2003
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,470,294 $ 1,901,962 $ 95,015
Noncash items included in net income:
Depreciation and amortization 209,646 202,873 196,205
Deferred income taxes (102,000) 135,000 62,000
Loss on disposal of property 2,931 -- --
Changes in current assets and liabilities:
Accounts receivable 44,013 (693,234) (1,247,936)
Inventory (161,048) 66,799 (409,290)
Prepaid items and other assets (225,795) (147,864) 60,624
Accounts payable (99,105) (104,189) 564,153
Accrued expenses (298,302) 772,512 152,874
----------- ----------- -----------
Net Cash Provided (Used) by Operating Activities 840,634 2,133,859 (526,355)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash and cash equivalents 152,647 (108,568) (277,454)
Purchase of property and equipment (111,985) (185,562) (155,686)
Other assets 4,372 (28,147) (1,297)
Proceeds from the sale of property and equipment 2,000 -- --
----------- ----------- -----------
Net Cash Provided (Used) by Investing Activities 47,034 (322,277) (434,437)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (58,995) (164,286) (224,816)
Proceeds from stock options exercised 5,625 -- --
(Payments on) proceeds from line of credit, net -- (399,454) 399,454
Proceeds from term notes payable -- -- 165,572
(Payments on) proceeds from stockholder notes -- (330,000) 330,000
----------- ----------- -----------
Net Cash Provided (Used) by Financing Activities (53,370) (893,740) 670,210
----------- ----------- -----------
Effect of exchange rate changes on cash (5,820) 4,149 --
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 828,478 921,991 (290,582)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,033,149 111,158 401,740
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,861,627 $ 1,033,149 $ 111,158
=========== =========== ===========
NONCASH INVESTING/FINANCING ACTIVITIES
Purchase of property and equipment via
Issuance of note payable $ 80,152 $ 129,500 $ --
=========== =========== ===========
See accompanying notes to consolidated financial statements.
Page 23
SUTRON CORPORATION AND SUBISIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Sutron Corporation (the "Company") was incorporated on December 30, 1975, under
the General Laws of the Commonwealth of Virginia. The Company operates from its
headquarters located in Sterling, Virginia. The Company has several branch
offices located throughout the United States, a branch office in India and a
wholly owned subsidiary in India. The Company is a leading provider of real-time
data collection and control products, systems software and professional services
in the hydrological and meteorological monitoring markets. The Company's
products include data loggers, satellite transmitters/loggers, sensors, and
system and application software. Customers consist of a diversified base of
Federal, state, local and foreign government agencies, universities and
hydropower companies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
The Company's revenue recognition policy is consistent with the requirements of
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements," Statement of Position No. 97-2 (SOP 97-2), "Software Revenue
Recognition," and other applicable revenue recognition guidance and
interpretations. In general, the Company records revenue when it is realized, or
realizable, and earned. The Company considers these requirements met when
persuasive evidence of an arrangement exists, the products or services have been
provided to the customer, the sales price is fixed or determinable and
collectibility is reasonably assured. The Company's revenue reflects reductions
attributable to discounts and customer returns.
For the Company's products, consisting of both equipment and software, revenue
is recognized upon shipment, delivery, installation or customer acceptance of
the product, as agreed in the customer order or contract. Sutron does sell its
software products without the related equipment although software products are
integral to systems. The Company's typical system requires no significant
production, modification or customization of the software or hardware. For
complex systems, revenue is deferred until customer acceptance. The Company does
provide customer discounts and does allow for product returns. The Company does
not do consignment sales or bill and hold. Revenue reflects reductions due to
discounts and product returns. Product returns have historically been
insignificant in amount.
The Company's sales arrangements for systems often include services in addition
to equipment and software. These services could include equipment integration,
software customization, installation, maintenance, training, and customer
support. For sales arrangements that include bundled hardware, software and
services, Sutron accounts for any undelivered service offering as a separate
element of a multiple-element arrangement. Amounts allocated to each element are
based on its objectively determined fair value, such as the sales price for the
product or service when it is sold separately. Revenue for these services is
typically recognized ratably over the period benefited or when the services are
complete.
The Company uses the percentage of completion method for recognizing revenue and
profits when it performs on fixed price contracts that extend over a number of
years. Under the percentage of completion method, revenue and profits are
recorded as costs are incurred based on estimates of total sales value and costs
at completion where total profit can be estimated with reasonable accuracy and
ultimate realization is reasonably assured. Profit estimates are revised
periodically based upon changes and facts, and any losses on contracts are
recognized immediately. Contracts may contain provisions to earn incentive and
award fees if targets are achieved. Incentive and award fees that can be
reasonably estimated are recorded over the performance period of the contract.
Incentive and award fees that cannot be reasonably estimated are recorded when
awarded. The Company recognizes revenue from time-and-materials contracts to the
extent of billable rates, times hours delivered, plus direct materials costs
incurred. Some
Page 24
of the contracts include provisions to withhold a portion of the contract value
as retainage. The Company's policy is to take into revenue the full value of the
contract, including any retainage, as it performs against the contract.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, cash equivalents include time
deposits and all highly liquid debt instruments with original maturities of
three months or less. Interest paid approximated $100, $32,500, and $27,900 for
the years ended December 31, 2005, 2004 and 2003, respectively. Income taxes
paid approximated $1,292,000 and $600,000 for the years ended 2005 and 2004,
respectively. No income taxes were paid in 2003. Foreign income tax paid
approximated $24,000 and $5,000 for the years ended December 31, 2005 and 2004,
respectively.
RESTRICTED CASH
For the years ended December 31, 2005 and 2004, the Company submitted contract
proposals that require bid bonds or bank guarantees. At December 31, 2005 and
2004, $233,375 and $108,568, respectively, of the cash and cash equivalents
balance is restricted for these bid bonds.
During 2004, the Company entered into international contracts that required
standby letters of credit, which expired March 2005. At December 31, 2004,
$277,454 of the cash and cash equivalents balance is restricted for these
standby letters of credit. Restrictions on cash are typically released within
three to nine months.
INVENTORY
Inventory is stated at the lower of cost or market. Electronic components costs,
work in process and finished goods costs consist of materials, labor and
overhead and are recorded at a standard cost that approximates the average cost
method. The Company provides allowances on inventories for any material that has
become obsolete or may become unsaleable based on estimates of future demand and
sale price in the market.
ACCOUNTS RECEIVABLE
Based on management's evaluation of uncollected accounts receivable at the end
of each year, bad debts are provided for utilizing the allowance method. The
allowance for doubtful accounts as of December 31, 2005 and 2004 approximate
$40,000 and $32,000, respectively. At December 31, 2005 and 2004, the Company's
investment in accounts 90 days or more past due is $701,218 and $434,818,
respectively, net of contract retainages.
PROPERTY AND EQUIPMENT
Equipment is recorded at cost and depreciated over their estimated useful lives,
ranging from 3 to 7 years, using the straight-line method for financial
statement purposes, and the straight-line and accelerated methods for income tax
purposes. Expenditures for maintenance, repairs, and improvements that do not
materially extend the useful lives of the assets are charged to earnings as
incurred. When items of property and equipment are disposed of, the cost of the
asset and the related accumulated depreciation are removed from the accounts.
Any gain or loss resulting from the removal from service is taken into the
current period earnings.
INCOME TAXES
The Company utilizes an asset and liability approach to accounting for income
taxes. The objective is to recognize the amount of income taxes payable or
refundable in the current year based on the Company's income tax return and the
deferred tax liabilities and assets for the expected future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns.
The asset and liability method accounts for deferred income taxes by applying
enacted statutory rates to temporary differences, the difference between
financial statement amounts and tax basis of assets and liabilities. The
resulting deferred tax liabilities or assets are classified as current or
noncurrent based on the classification of the related asset or liability.
Deferred income tax liabilities or assets are adjusted to reflect changes in tax
laws or rates in the year of enactment.
Page 25
FOREIGN CURRENCY TRANSLATION
Results of operations for the Company's foreign branch office and foreign
wholly-owned subsidiary are translated from the designated functional currency
to the U.S. dollar using average exchange rates during the period, while assets
and liabilities of the foreign branch office are translated at the exchange rate
in effect at the reporting date. Resulting gains or losses from translating
foreign currency financial statements are included in other comprehensive
income, net of any related tax effect.
FINANCIAL INSTRUMENTS
The estimated fair value of cash and cash equivalents, accounts receivable,
accounts payable, other accrued expenses, and short term notes payable
approximate their carrying amounts in the financial statements.
Based on the borrowing rates currently available to the Company for debt with
similar maturity dates and collateral, the estimated fair value of long-term
debt is $89,000 and $90,000 at December 31, 2005 and 2004, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could vary from the estimates that were
used.
CAPITAL
The Company has 12,000,000, $.01 par value, shares authorized. There were
4,294,551 shares issued and outstanding at December 31, 2005, and 4,289,551
shares issued and outstanding at December 31, 2004 and 2003.
EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
128 that establishes standards for computing and presenting earnings per share
(EPS) for entities with publicly held common stock. The standard requires
presentation of two categories of earnings per share, basic EPS and diluted EPS.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the year. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company.
STOCK COMPENSATION PLANS
Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, whereby compensation cost is the excess, if any, of the quoted market
price at the stock grant date (or other measurement date) over the amount an
employee must pay to acquire the stock. Stock options issued under the Company's
stock option plan have no intrinsic value at the grant date, and under Opinion
No. 25 no compensation cost is recognized for them. The Company has elected to
continue with the accounting methodology in Opinion No. 25 and, as a result, has
provided pro forma disclosures of net income and earnings per share and other
disclosures, as if the fair value based method of accounting had been applied.
In December 2004, the FASB issued SFAS No. 123(R), SHARE-BASED PAYMENT, which is
a revision of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS No.
123(R) is effective for public companies for interim or annual periods beginning
after June 15, 2005, supersedes APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, and amends SFAS No. 95, STATEMENT OF CASH FLOWS. SFAS No. 123(R)
requires all share-based
Page 26
payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative.
If the Company had elected to recognize compensation cost for the plan based on
the fair value at the grant dates for awards under those plans, consistent with
the method prescribed by SFAS No. 123, net income and earnings per share would
have been changed to the pro forma amounts indicated below:
2005 2004 2003
---------- ---------- ----------
Net income As reported $1,470,294 $1,901,962 $ 95,015
Pro forma 1,418,960 1,857,958 69,010
Earnings per share
- Basic As reported $ .34 $ .44 $ .02
- Basic Pro forma $ .33 $ .43 $ .02
- Diluted As reported $ .30 $ .38 $ .02
- Diluted Pro forma $ .29 $ .38 $ .02
The fair value of Sutron Corporation stock options used to compute pro forma net
income and earnings per share disclosures is the estimated present value at
grant date using the Black-Scholes pricing model, with the following
assumptions:
Risk free rate 4.1% 3.4% 3.0%
Expected volatility 32% 30% 30%
Dividend yield 0% 0% 0%
Holding period 5 years 5 years 9 years
RECLASSIFICATIONS
The accompanying consolidated financial statements for prior fiscal years
contain certain reclassifications to conform to the presentation used in Fiscal
2005. These reclassifications of prior fiscal year balances have no impact on
net income.
2. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, consists of the following:
2005 2004
------------ ------------
Current $ 2,390,421 $ 2,617,094
Costs in excess of billings and
estimated earnings 1,321,005 730,120
Contract retainage - 408,225
------------ ------------
Totals $ 3,711,426 $ 3,755,439
============ ============
3. INVENTORY
Inventory consists of the following at December 31:
2005 2004
------------ ------------
Electronic components $ 1,064,385 $ 786,296
Work in process 933,008 1,077,091
Finished goods 535,131 508,089
------------ ------------
Totals $ 2,532,524 $ 2,371,476
============ ============
4. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 is as follows:
Page 27
2005 2004
------------ ------------
Furniture, fixtures and equipment $ 2,740,177 $ 2,649,294
Vehicles 391,974 301,056
Leasehold improvements 89,935 87,818
------------ ------------
Totals $ 3,222,086 $ 3,038,168
============ ============
Accumulated depreciation and amortization at December 31, is as follows:
2005 2004
------------ ------------
Furniture, fixtures and equipment $ 2,331,972 $ 2,190,991
Vehicles 163,477 101,714
Leasehold improvements 39,405 35,791
------------ ------------
Totals $ 2,534,854 $ 2,328,496
============ ============
Depreciation and amortization expense totaled $209,646, $202,873 and $196,205
for the years ended December 31, 2005, 2004 and 2003, respectively.
5. LINE OF CREDIT
The Company has a $2,000,000 line of credit with a commercial bank. The line of
credit is collateralized by substantially all of the assets of the Company and
expires August 2006. Under the terms of the line of credit, the Company is
required to maintain certain financial covenants. Interest is charged at the
bank's prime rate plus one-half percent and is payable monthly. There was no
balance outstanding at December 31, 2005 or 2004.
The Company frequently bids on and enters into international contracts that
require bid and performance bonds. At December 31, 2005 and 2004, a commercial
bank had issued standby letters of credit in the amount of $751,725 and $186,354
that served as either bid or performance bonds. The amount available under the
line of credit is reduced by this amount.
6. OTHER ACCRUED EXPENSES
Components of other accrued expenses consist of the following at December 31:
2005 2004
------------ ------------
Accrued vacation pay $ 207,905 $ 186,131
Accrued profit sharing 188,000 175,000
Accrued warranty costs 288,000 272,000
Subcontractor costs 384,821 343,496
Federal income taxes - 336,786
Other accruals 111,199 87,366
------------ ------------
Totals $ 1,179,925 $ 1,400,779
============ ============
7. ACCRUED WARRANTY COSTS
The Company warranties its products for up to two years and estimated warranty
costs are based upon management's best estimate of the amounts necessary to
settle future and existing claims on equipment sold as of the balance sheet
date. Factors considered include actual past experience of product returns and
the related estimated cost of labor and material to make the necessary repairs
as well as technological advances and enhanced design and manufacturing
processes. If actual future product return rates or the actual costs of material
and labor differ from the estimates, adjustments to the accrued warranty
liability are made. Changes to the product warranty reserve are identified below
and represent adjustments to the reserve based on management estimates and other
factors as noted above:
Page 28
Balance as of December 31, 2003 $ 200,000
Reserve adjustment for current sales 72,000
------------
Balance as of December 31, 2004 272,000
Reserve adjustment for current sales 16,000
------------
Balance as of December 31, 2005 $ 288,000
============
8. NOTES PAYABLE
Notes payable consist of the unpaid balances of notes from various finance
companies for vehicle acquisitions and are secured by the underlying vehicles.
Monthly installments range from $259 to $800 and include interest from 0 percent
to 5.61 percent. The balances outstanding at December 31 are as follows:
2005 2004
------------ ------------
Long-term maturities $ 88,773 $ 89,666
Current maturities 47,663 25,613
------------ ------------
Totals $ 136,436 $ 115,279
============ ============
Principal payments required over the remaining payment periods as of December 31
are as follows:
Years ending December 31:
2006 $ 47,663
2007 50,722
2008 38,051
------------
Total $ 136,436
============
A note payable of $330,000 to a stockholder was paid off during the year ended
December 31, 2004. The note accrued interest at 7.25 percent per annum. Interest
paid on the note was $18,210 and $7,395 for the years ended December 31, 2004
and 2003, respectively.
9. LEASE OBLIGATIONS
The Company leases space for its headquarters and production facilities, which
were renewed in 2005 and expire March 2009. The operating lease calls for
monthly rent of $12,616 and increases three percent per annum, thereafter. The
lease agreement includes additional rent payments based on a pro rata portion of
maintenance fees and operating expenses on the land and building. The Company
leases additional office and warehouse space in Sterling, Virginia. The lease
was renewed in 2005 and expires March 2009 and requires monthly rent payments of
$5,500. The Company leases office and warehouse space in West Palm Beach,
Florida. The four-year lease, expiring in August 2008, requires monthly payments
of $5,827. The Company entered into a lease agreement for office space in
Brandon, Florida. The five-year lease, expiring on December 31, 2008, requires
monthly payments of $1,984 and increases of four percent per annum, thereafter.
The following is a schedule of future minimum lease payments by year:
Years ending December 31:
2006 $ 309,352
2007 314,536
2008 295,872
2009 56,655
------------
Total $ 976,415
============
Rent expense amounted to $307,695, $282,706 and $274,243 for the years ended
December 31, 2005, 2004 and 2003, respectively.
10. INCOME TAXES
The income tax (expense) benefit charged to operations for the years ended
December 31, were as follows:
Page 29
2005 2004 2003
----------- ----------- -----------
Current income tax expense $ (857,000) $ (943,000) $ (37,000)
Deferred tax benefit (expense) 102,000 (135,000) 89,000
----------- ----------- -----------
Total income tax (expense) benefit $ (755,000) $(1,078,000) $ 52,000
=========== =========== ===========
Deferred tax assets, are comprised
of the following at December 31:
2005 2004 2003
----------- ----------- -----------
Accrued vacation and warranty $ 193,000 $ 179,000 $ 120,000
Accounts receivable and inventory
allowances 85,000 -- --
Business tax credits -- -- 133,000
----------- ----------- -----------
Gross deferred tax assets 278,000 179,000 253,000
Gross deferred tax liability -
depreciation (169,000) (172,000) (111,000)
----------- ----------- -----------
Net deferred tax assets $ 109,000 $ 7,000 $ 142,000
=========== =========== ===========
The realization of the deferred tax assets is dependent on future taxable
earnings. The Company has not provided for a deferred tax asset valuation
allowance due to their current and anticipated future earnings.
A reconciliation between the amount of reported income tax expense and the
amount computed by multiplying the applicable statutory Federal income tax rate
is as follows:
2005 2004 2003
----------- ----------- -----------
Income before income taxes $ 2,225,294 $ 2,979,962 $ 43,015
Applicable statutory tax rate 34% 34% 34%
----------- ----------- -----------
Computed "expected" Federal
income tax expense (757,000) (1,013,000) (15,000)
Adjustments to Federal income tax
resulting from:
State income tax expense (111,000) (115,000) (2,000)
Tax credits 113,000 50,000 69,000
----------- ----------- -----------
Income tax (expense) benefit $ (755,000) $(1,078,000) $ 52,000
=========== =========== ===========
11. MAJOR CUSTOMERS
Set forth below are customers, including agencies of the U.S. Government, from
which the Company received more than ten percent of total revenue, for the years
ended December 31:
2005 2004 2003
---- ---- ----
Department of Interior 22% 20% 27%
International 25% 32% 28%
Commercial 31% 24% 27%
Department of Commerce 16% - -
Department of Defense - 16% 10%
Set forth below are customers, including agencies of the U.S. Government, from
which the Company had more than ten percent of total accounts receivable
outstanding for the years ended December 31, 2005 and 2004:
2005 2004
----------- -----------
South Florida Water Management $ 855,896 $ 479,060
National Oceanic and Atmospheric Administration $ -- $ 879,791
Page 30
12. CONCENTRATIONS OF CREDIT RISK
At times throughout the year, cash and cash equivalents exceeded FDIC insurance
limits. As of December 31, 2005 and 2004, the Company's cash deposits exceeded
the FDIC insured amount by approximately $1,854,000 and $1,189,000,
respectively. The Company's products use certain standard and application
specific components that are acquired from one or a limited number of sources.
The Company has generally been able to procure adequate supplies of these
components in a timely manner from existing sources. The Company's inability to
obtain a sufficient quantity of components when required or to develop
alternative sources at acceptable prices and within a reasonable time, could
result in delays or reductions in product shipments which could materially
affect the Company's operating results in any given period.
13. STOCK OPTION PLANS
The Company has granted stock options under the 2002, 1997 and the 1996 Stock
Option Plans to key employees and directors for valuable services provided to
the Company. Under the 1996 Plan, the Company authorized 260,000 shares, 259,000
of which have been granted. As of December 31, 2004, the Company authorized
60,000 shares and 400,000 shares under the 1997 and 2002 Stock Option Plans,
respectively, all of which have been granted. During 2005, the 2002 Stock Option
Plan was amended to authorize 650,000 shares, 420,333 of which have been
granted. In addition, all three plans were amended in 2005 to allow Directors to
participate in the plan, and that vesting schedules will be determined by the
Board at the time each individual option is granted. Shares under all of the
plans may be granted at not less than 100 percent of the fair market value at
the grant date. All options have a ten-year term from the date of grant. Prior
to the 2005 amendments, options vested ratably over five years on each
anniversary date the option was granted. The Company elected to accelerate
vesting of all outstanding options as of December 31, 2005, as permitted under
the plans. Cancelled or expired options are able to be reissued.
The following summarizes the option activity under these plans for the last
three years:
Weighted
Option Average
Price Number of Exercise
Per Share Shares Price
------------- ----------- -----------
Outstanding, December 31, 2002 $ .40 - 1.125 529,000 $ .75
Grants .68 - .75 180,000 $ .68
Exercised - - -
Cancelled or expired - - -
------------- ----------- -----------
Outstanding, December 31, 2003 .40 - 1.125 709,000 $ .73
Grants 2.8 10,000 $ 2.80
Exercised - - -
Cancelled or expired - - -
------------- ----------- -----------
Outstanding, December 31, 2004 .40 - 2.80 719,000 $ .76
Grants 5.50 - 7.45 28,333 $ 6.53
Exercised 1.125 5,000 $ 1.125
Cancelled or expired 1.125 3,000 $ 1.125
------------- ----------- -----------
Outstanding, December 31, 2005 $ .40 - 7.45 739,333 $ .98
============= =========== ===========
The weighted average fair value of options granted during the three years is as
follows:
December 31, 2003 $ .37
December 31, 2004 $ 7.20
December 31, 2005 $ 2.97
The weighted average remaining contractual life of options outstanding at
December 31, 2005 is 5.5 years.
Page 31
14. EARNINGS PER SHARE
The following table shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average number of shares
of potential dilutive common stock.
Years Ended December 31,
--------------------------------------
2005 2004 2003
---------- ---------- ----------
Net income $1,470,294 $1,901,962 $ 95,015
Shares used in calculation of
income per share:
Basic 4,292,051 4,289,551 4,289,551
Effect of dilutive options 641,761 661,558 35,743
---------- ---------- ----------
Diluted 4,933,812 4,951,109 4,325,294
Net income per share:
Basic $.34 $.44 $.02
Diluted $.30 $.38 $.02
Contracts to issue common stock that are anti-dilutive in nature are not
included in the earnings per share calculations.
15. PROFIT SHARING PLAN
The 401(k) Profit Sharing Plan covers substantially all full time employees.
Contributions to the plan are determined each year by the Board of Directors
based on profits. The Company made a profit sharing contribution for the years
ended December 31, 2005 and 2004 of $188,000 and $175,000, respectively. No
contribution was made for the year ended December 31, 2003.
16. SEGMENT INFORMATION
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about
Segments of an Enterprise and Related Information establishes standards for the
manner in which public companies report information about operating segments in
annual and interim financial statements. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The method for determining what information to report is based on the
way management organizes the operating segments within the Company for making
operating decisions and assessing financial performance. The Company's chief
operating decision-maker is considered to be the Company's chief executive
officer (CEO). The CEO reviews financial information presented based on
divisions, comprised of products and/or services. Nearly all of the Company's
operations and assets are located at its headquarters location. Therefore,
indirect costs are not allocated among segments.
..
The Company currently reports its results in three divisions: Hydromet Products,
Integrated Systems and Hydrological Services. Hydromet Products division is
responsible for the manufacture and sale of the Company's products including
dataloggers, satellite transmitters and sensors. The Integrated Systems division
is responsible for systems design, integration and installation of turnkey
hydrometeorological systems. The Company's Hydrological Services division
provides data interpretation and analysis services including modeling, flood
forecasting and hydrologic studies. The results of these segments are shown
below (in thousands):
2005 2004 2003
---------- ---------- ----------
Revenue
HydroMet Products $ 9,305 $ 10,689 $ 6,592
Integrated Systems 3,490 3,631 3,432
Hydrological Services 2,639 2,359 992
---------- ---------- ----------
Totals $ 15,434 $ 16,679 $ 11,016
========== ========== ==========
Cost of Goods Sold
HydroMet Products $ 4,576 $ 6,030 $ 4,414
Integrated Systems 2,064 2,063 2,441
Hydrological Services 2,476 2,160 804
---------- ---------- ----------
Totals $ 9,116 $ 10,253 $ 7,659
========== ========== ==========
Page 32
Gross Margin
HydroMet Products $ 4,729 $ 4,659 $ 2,178
Integrated Systems 1,426 1,568 991
Hydrological Services 163 199 188
---------- ---------- ----------
Totals $ 6,318 $ 6,426 $ 3,357
========== ========== ==========
17. EXPORT SALES
Export sales from the Company's operations at December 31, were as follow
(in thousands):
2005 2004 2003
---------- ---------- ----------
Central and South America $ 1,238 $ 695 $ 1,597
Canada 750 246 175
Asia 1,363 1,266 850
Australia/New Zealand 47 63 35
Europe and other 438 3,141 415
---------- ---------- ----------
$ 3,836 $ 5,411 $ 3,072
========== ========== ==========
18. LEGAL CONTINGENCIES
Various legal claims can arise from time to time in the normal course of
business which, in the opinion of management, will have no material effect on
the Company's financial statements. The Company has been named in a compensation
claim under the Indian Anti-Trust Law that is pending before The Monopolies and
Restrictive Trade Practices Commission in New Delhi, India. Management feels
strongly that the case is unsubstantiated and does not anticipate that any
losses will occur.
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ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
ITEM 8A - CONTROLS AND PROCEDURES
---------------------------------
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management (with the participation of our Chief Executive Officer and Chief
Financial Officer) evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), as of December 31, 2005,
the end of the fiscal period covered by this report on Form 10-KSB. Securities
and Exchange Commission, or SEC, rules define the term "disclosure controls and
procedures" to mean a company's controls and other procedures that are designed
to ensure that information required to be disclosed in the reports it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time period specified in the SEC's rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by a company in its
reports filed under the Exchange Act is accumulated and communicated to the
company's management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
As previously discussed in our report as amended on Form 10-KSB/A for the fiscal
year ended December 31, 2004 and our reports on Form 10-QSB for the quarters
ended March 31, June 30 and September 30, 2005, we identified control weaknesses
relating to our non-compliance with certain disclosure requirements in the SEC's
rules relating to periodic reports. Our control weaknesses related to our
failure to devote sufficient resources to keep abreast of changing disclosure
requirements, including those requirements that were imposed after the passage
of the Sarbanes-Oxley Act of 2002. We have corrected the identified weaknesses
by, among other things, allocating additional personnel to the disclosure
process including a review of all quarterly earnings news releases by the
Company's audit committee that is comprised of independent directors, and by
engaging outside counsel to review our SEC filings on a more frequent basis.
Based on the evaluation of the effectiveness of our disclosure controls and
procedures by our management with the participation of the Chief Executive
Officer and Chief Financial Officer, our Chief Executive Officer and Chief
Financial Officer has concluded that, as of the end of the period covered by
this report, our disclosure controls and procedures were effective.
A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, have been or will be detected. These inherent
limitations include the fact that there are resource constraints, and that the
benefits of controls must be considered relative to their costs. Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial reporting that
occurred during the quarter ended December 31, 2005 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 8B - OTHER INFORMATION
---------------------------
None
Page 34
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
-------------------------------------------------
The Board has adopted a Code of Conduct and Ethics that applies to Sutron's
principal executive officer, principal financial officer and all other employees
of the Company. This Code of Conduct and Ethics is posted on the Company's
website at http://www.sutron.com on the investors' page. Any amendments to the
Code of Ethics and waivers of the Code of Ethics for our principal executive,
accounting or financial officers will be published on our website.
The remainder of information required for this Item is incorporated by reference
to the Proxy Statement to be filed in connection with our 2006 Annual Meeting of
Shareholders.
ITEM 10 - EXECUTIVE COMPENSATION
--------------------------------
The information required for this Item is incorporated by reference to the Proxy
Statement to be filed in connection with our 2006 Annual Meeting of
Shareholders.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------
The information required for this Item is incorporated by reference to the Proxy
Statement to be filed in connection with our 2006 Annual Meeting of
Shareholders.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------
The information required for this Item is incorporated by reference to the Proxy
Statement to be filed in connection with our 2006 Annual Meeting of
Shareholders.
ITEM 13 - EXHIBITS
------------------
3(a) Copy of Articles of Incorporation of Sutron Corporation, received and
approved December 30, 1975
3(b) Copy of Articles of Amendment to the Articles of Incorporation and
Articles of Reduction of Stated Capital of Sutron Corporation received
and approved September 7, 1983
3(c) By-Laws of the Registrant
3(d) Copy of Articles of Amendment to the Articles of Incorporation received
and approved June 8, 1995
4(g) 1996 Stock Option Plan
4(h) 2002 Stock Option Plan
10(x) Stock Option Agreement between The Company and Raul S. McQuivey dated
October 18, 2002
10(y) Stock Option Agreement between The Company and Daniel W. Farrell dated
October 18, 2002
10(z) Stock Option Agreement between The Company and Sidney C. Hooper October
18, 2002
10.1 Stock Option Agreement between The Company and Thomas N. Keefer dated
October 18, 2002
10.2 Stock Option Agreement between The Company and Robert F. Roberts, Jr.
dated December 18, 2003
10.3 Stock Option Agreement between The Company and Robert F. Roberts, Jr.
dated May 13, 2004
10.4 Stock Option Agreement between The Company and Andrew D. Lipman dated
December 22, 2005 (filed herewith)
10.5 Stock Option Agreement between The Company and Thomas R. Porter dated
December 22, 2005 (filed herewith)
10.6 Stock Option Agreement between The Company and Robert F. Roberts, Jr.
dated December 22, 2005 (filed herewith)
10.7 Amendment to Stock Option Agreements between the Company and Raul S.
McQuivey dated December 22, 2005 (filed herewith)
10.8 Amendment to Stock Option Agreements between the Company and Daniel W.
Farrell dated December 22, 2005 (filed herewith)
10.9 Amendment to Stock Option Agreements between the Company and Sidney C.
Hooper dated December 22, 2005 (filed herewith)
10.10 Amendment to Stock Option Agreement between the Company and Thomas N.
Keefer dated December 22, 2005 (filed herewith)
Page 35
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
------------------------------------------------
The information required for this Item is incorporated by reference to the Proxy
Statement to be filed in connection with our 2006 Annual Meeting of
Shareholders.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SUTRON CORPORATION
(Registrant)
/s/ Raul S. McQuivey Date: March 30, 2006
---------------------------
By: Raul S. McQuivey,
Chairman of the Board of Directors and President
In accordance with the Securities Exchange Act, this report has been signed by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
/s/ Raul S. McQuivey Date: March 30, 2006
---------------------------
By: Raul S. McQuivey,
Chairman of the Board of Directors and President
/s/ Daniel W. Farrell Date: March 30, 2006
---------------------------
By: Daniel W. Farrell, Director and Vice President
/s/ Andrew D. Lipman Date: March 30, 2006
---------------------------
By: Andrew D. Lipman, Director
/s/ Thomas R. Porter Date: March 30, 2006
---------------------------
By: Thomas R. Porter, Director
/s/ Robert F. Roberts, Jr. Date: March 30, 2006
---------------------------
By: Robert F. Roberts, Jr., Director
Page 36