UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 KSB
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Annual Report Pursuant To Section 13 Or 15(D)
Of The Securities Exchange Act Of 1934
For the fiscal year ended: December 31, 2003
Commission file number: 0-12227
Sutron Corporation
(Exact name of registrant as specified in its charter.)
Virginia 54-1006352
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21300 Ridgetop Circle, Sterling Virginia 20166
(Address of principal executive offices) (Zip Code)
(703) 406-2800
(registrants telephone number, including area code)
Indicate by check mark 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. [ ]
Issuer's revenues for its most recent fiscal year were
$11,015,689.
The aggregate market value of the voting stock held by non-
affiliates as of March 22, 2004 was approximately $2,177,000
based on the fair market value of such stock.
The number of shares outstanding of the issuer's
Common Stock, $.01 par value, as of March 22, 2004 was 4,289,551.
Documents Incorporated by Reference
Portions of the registrants definitive proxy statement dated
April 14, 2004 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, 2003
TABLE OF CONTENTS
Part I
ITEM 1. DESCRIPTION OF BUSINESS 2
ITEM 2. DESCRIPTION OF PROPERTY 7
ITEM 3. LEGAL PROCEEDINGS 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 8
SECURITY HOLDERS
Part II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED 8
STOCKHOLDER MATTERS
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS 9
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 7. FINANCIAL STATEMENTS 11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH 11
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 8A. CONTROLS AND PROCEDURES 11
Part III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF 12
THE REGISTRANT
ITEM 10. EXECUTIVE COMPENSATION 12
ITEM 11. SECURITY OWNERSHIP OF CERTAIN 12
BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED 12
TRANSACTIONS
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND 13
REPORTS ON FORM 8-K
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 15
SIGNATURES 16
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PART I
ITEM 1 - BUSINESS
General
Sutron Corporation (the Company) was incorporated on
December 30, 1975 under the General Laws of the Commonwealth
of Virginia. The Company designs, manufactures and markets
products and solutions that enable government and commercial
entities to monitor and collect hydrological and meteorological
data for the management of critical water resources, for early
warning of potentially disasterous floods or storms and
for the optimization of hydropower plants.
The Company's headquarters is located at 21300
Ridgetop Circle, Sterling, Virginia 20166, and the Company's
telephone number at that location is (703) 406-2800. The Company
maintains a worldwide web address at www.sutron.com. The Company
makes available free of charge through the Investors section
of the Company's website at www.verso.com the annual, quarterly
and current reports, and amendments thereto, which the Company
files with, or furnishes to, the SEC. Such reports and
amendments are available on the Company's website as soon as
reasonably practical after the Company has filed such reports
with, or furnished such reports to, the SEC.
Sutron is focused on providing real-time solutions and
services to our customers in three areas of the hydrological
and meteorological markets. First, we provide real time data
dataloggers, satellite transmitters and sensors. Second,
we provide turnkey integrated systems for hydrological and
meteorological networks and airport weather systems.
Third, we provide services consisting of installation,
maintenance of hydrological and meteorological systems, and
other related engineering services. The Companys customers
include a diversified base of federal, state, local and foreign
governments, engineering companies, universities, and hydropower
companies.
The Company's ongoing, strategic business units consist of the
Company's Hydromet Products Divison, the Integrated Systems
Division, the Hydrological Services Division and the Airport
Weather Systems division. Each unit includes a range of products
and services designed to meet the specific needs of a particular
customer segment.
Hydromet Products Division
The Hydromet Products Division manufactures data
loggers, satellite transmitters and sensors. Sutron's data loggers
collect sensor data and transmit the data to central facilities
primarily by satellite radio but also by telephone, fiber optics
or microwave. Sutron's 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. The Companys
equipment is compatible with sensors from other companies.
Sutron has long-standing relationships with suppliers for wind
speed and wind direction, water quality, humidity and solar
radiation sensors. The Company received an ISO 9001
certification on March 12, 1999 and an ISO 9001:2000 certification
on August 13, 2003. 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 the Companys next generation datalogger.
It is built upon a Microsoft CE operating system, has a 486
processor, C++ programming and standard 2 MB memory that is
expandable to over 1 gigabyte. It enables the Company to enter closely
related environmental markets such as tides and 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.
SatLink G312-1
The SatLink G312-1 is a high data rate satellite transmitter that
transmits at 100, 300 and 1200 baud, incorporates GPS and functions
as a logger. The unit was certified by 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 Geostationary Operational Environment Satellite (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. SatLink is also certified on satellite
systems in Europe and Asia and relays data from even the most
remote sensors and loggers to everywhere around the globe and
works with virtually all dataloggers. SatLink is programmable from
any PC using software provided with the unit.
SL2-G312-1
The Company invested heavily in the redesign of the SatLink transmitter
beginning in 2002 and continuing in 2003. In January 2004, the
SL2-G312-1 Satellite Transmitter (SatLink2) was certified by NESDIS.
The SatLink2 is a redesign of the original SatLink transmitter in order
to improve our margins and to provide the latest features. We believe
that the SatLink2 can beat competing high data rate transmitters in
price, features and performance. We believe that the SatLink2 will
enable our Company to dominate the 100 bps GOES transmitter replacement
program and be more competitive in large national and global systems
such as the National Weather Service Cooperative Observer Program (COOP),
the World Meteorological Organization Global Climatological Observer
System GCOS program and large projects in India and Venezuela.
Accubar Gauge Pressure Sensor
The Accubar Gauge Pressure sensor 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 2003 and 2002 our Hydromet Products Division
provided state-of-the-art tide stations to the National Ocean Survey
valued at $637,000 and $471,000. Sutron tide stations are based on our Xpert
data logger. 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.
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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 Sutrons
real-time database software (XConnect), and long-term software
support for XConnect users. This capability allows the Company
to provide turnkey hydrological and meteorological systems to
a variety of users. Projects range in size from one station to hundreds
of stations. Projects usually require design, equipment integration,
software application development and installation and training on both
hardware and software. Projects can range in duration from a few days
to twelve months depending on the scope and complexity of the system.
Hydrological Services Division
The Company provides hydrological services which include provides data
interpretation and analysis services, 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) and environmental
permitting and legal or expert witness.
Airport Weather Systems
The Airport Weather Systems Division was started in July 2003
with the hiring of a division manager with over 20 years experience
in the Automatic Weather Observation System (AWOS) market.
Monitoring of real-time weather data is crucial to flight safety.
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. Sutron is leveraging its
experience with sensors and data collection to enter this market.
Distribution Methods of Products and Services
The Companys products and services are currently sold in the
United States by the Companys direct sales force. As of
December 31, 2003, the Company employed seven salaried sales and
marketing personnel, including four engaged directly in field
sales activities, and three in various other marketing and sales
support functions. Internationally, the Company utilizes
agents to sell its products and services.
4
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Customers
During 2003, approximately 45% of the Companys products and
services were sold to the Federal Government. Revenues in 2003
among the various agencies were as follows: U.S. Army Corps of
Engineers, 9%; Department of the Interior, 28%; Department of
Commerce, 7% and various other agencies of the federal
government, 1%. The revenues from the Corps of Engineers
were spread among some ten (10) separate Districts, and the
revenues from the Department of the Interior among two (2)
agencies, the U.S. Geological Survey and the Bureau of Reclamation.
The Company also performed on various contracts of foreign
origin. Total revenues from foreign customers amounted to
approximately 28% of total revenues in 2003, 29% of total
revenues in 2002 and 12% in 2001. Sutron actively markets
its products and services internationally.
Contracts for products or services with federal, state and
local government agencies typically allow for termination at
the convenience of the government and for audit and annual
negotiation of overhead rates. Upon termination, the Company
would be entitled to reimbursement for allowable costs incurred
and to a proportionate share of profits or fees earned to the
date of termination. Such contracts are also typically
dependent upon compliance by the contractor with applicable
civil rights, equal employment opportunity, and contract
procurement requirements.
The Company at this time has no reason to believe that any
material changes will occur in the
foreseeable future with respect to federal, state, or local
government programs or services with respect to which the
Company has been granted its contracts or provides its
services. However, due to changes in administration, national
goals and budgetary restrictions, funding of such programs or
services could be altered or abolished. If a substantial cut-
back in the level of funding by the applicable government
agency were to occur, it would have a material adverse effect
on the Company.
Competition
The Company is aware of both domestic and foreign competitors
offering complete real-time networks of their own and
companies which fabricate real-time networks from components
manufactured by themselves and others. The Company is also
aware of numerous additional firms, ranging in size from large
to small, from general to highly specialized, and from new to
well established, offering 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 those of the Company. The Company
may also be at a competitive disadvantage because it purchases
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 the Companys products.
The Company, with respect to its professional engineering and
technical services, is 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 than the Company.
As to its hydrological services, the Company is 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 than the Company.
Price, performance and experience are believed by
the Company to be the primary competitive factors with respect
to all of its products and services.
5
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Research and Development
During the three years ended December 31, 2003, 2002, and 2001,
Sutron's internally funded research and development costs were
$1,065,558, $1,480,706 and $1,434,129 respectively.
The Company invested heavily in the redesign of the SatLink transmitter
beginning in 2002 and continuing in 2003. In January 2004, the
SL2-G312-1 Satellite Transmitter (SatLink2) was certified by the
National Environmental Satellite, Data and Information Service NESDIS.
The SatLink2 is a redesign of the original SatLink transmitter in order
to improve our margins and to provide the latest features. It is not
only a satellite transmitter but also has logging capability which
is attractive to customers who have limited logging requirements and
therefore avoids the purchase of a separate datalogger.
In 2002, the company released the logger version of the SatLink
and developed tidal monitoring applications based on the Xpert and
XLite products that were instrumental in winning orders from the
National Ocean Survey for tides systems. The Company released
the Xpert and XLite dataloggers in 2001.
In 2002, the Company released XConnect, a base station software
application that is compatible with leading database software
including Oracle and Microsoft SQL Server. The Company
added enhancements to XConnect's reporting features in 2003
incorporating Crystal reports.
Patents, Trademarks, Copyrights and Agreements
Although the Company does not deem patent protection to be of
significant importance to its industry, it has and may in the
future seek patents for certain of its products, real-time
networks, and technology as well as Company software products,
real-time networks, and technology. Company software products
and innovations may not be patentable but may be subject to
automatic but limited copyright protection. The Company has
treated its products, real-time networks, technology and
software as proprietary and relies on trade secret laws and
internal non-disclosure safeguards rather than making their
designs and processes generally available to the public by
applying for patents. Further, the Company believes 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 Company personnel and
their ability to design and develop enhanced and new products,
real-time networks and their components.
Raw Materials
The raw materials used by the Company, such as electronic
components and fabricated parts, are generally available from a
wide variety of sources at competitive prices. The Company does
not anticipate that its present or proposed business activities
would be substantially adversely affected by the scarcity of
any raw materials.
Backlog
The Companys backlog at December 31, 2003 was $4,350,688 as
compared with $2,784,499 at December 31, 2002. The Company
anticipates that 84% of its 2003 year-end backlog will be
shipped in 2004.
Employees
The Company had a total of 57 employees as of December 31,
2003 of which 56 were full time.
6
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ITEM 2 - PROPERTIES
On July 30, 1992, the Company entered into a five and one-half
year lease, for approximately 17,000 square feet of
manufacturing and office space in Sterling, Virginia. The
lease commenced on October 23, 1992. This facility allowed the
Company to consolidate it's manufacturing, systems integration,
research and development, and sales and administration
departments into one building. An option for an additional five
years was exercised in 1997. An option for an additional
three years was exercised in November 2002. The lease will
expire in March 2006.
In July, 1999, the Company leased additional space of approximately
7,000 square feet in Sterling, Virginia. Two departments, integrated
systems and research and development were relocated to the new space
during fiscal year 2000 in order to provide increased production and
warehouse space at the corporate headquarters. The lease expires in
March 2003 and has been renewed for three more years and will expire
in March 2006.
The Company entered into a lease agreement in October 2002 for
approximately 3800 square feet of office and warehouse space in West
Palm Beach, Florida. The four year lease expires in October 2006. The
Hydrological Services division will use this space which consists of
both office and warehouse space.
The Company entered into a lease agreement for approximately 1500
square feet of office space in Brandon, Florida. The five-year lease,
expires in December 2008. The Hydrological Services division will
use this space for offices.
The Company believes that its facilities are adequate for its
present needs and that its properties are in good condition,
well maintained and adequately insured.
ITEM 3 - LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation with
customers, vendors, suppliers and others in the ordinary course
of business, and a number of such claims may exist at any given time.
All such existing proceedings are not expected to have a material
adverse impact on the Company's results of operations or financial
condition. The Company is a party to the proceedings discussed below.
In 2003, the Company filed a claim with the Advance Tax Court
of India seeking a ruling on a decision by the Government of
Andhra Pradesh (GoAP) of India to assess a 48% income tax on the
Company's contract of approximately $1,606,000. The GoAP believes
that the Company has established a branch office in India and is
therefore subject to Indian income tax. Although the Company did
file an application for branch office status and received approval
to open a branch office, the Company did not complete the
registration and approval process with the Government of India
and has not opened a branch office in India. The income tax
amount that is at issue is approximatly $770,000.
The Advance Tax Court of India will hear the case in April 2004.
In the event that the Advance Tax Court rules in the Company's
favor, GoAP must immediately remit all amounts due including
interest. The Company will not immediately receive the entire
amount of $770,000 due to the system having not completed final
acceptance which is anticipated by mid-2004. The balance that
the Company would receive immediatly would be approximately
$23,000. In the event that the Company does not receive a
favorable ruling from the Adance Court, the income tax
withheld by GoAP would be used as an income tax credit on the
Company's 2004 income tax return.
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ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 2003 to a
vote of the Companys security holders, either through the
solicitation of proxies or otherwise.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information
The common stock of Sutron Corporation is quoted over the
counter through the NASD Bulletin Board supplied by the
National Association of Securities Dealers, Inc. under the
symbol STRN, and through the Pink Sheet Service of the National
Quotation Bureau, Inc. The following table shows the high and
low bid quotations in 2003 and 2002 by quarter as reported by
the National Quotation Bureau, Inc. and the National
Association of Securities Dealers, Inc. These quotations
represent prices between dealers in securities, do not include
retail mark-ups, mark-downs, or commissions and do not
necessarily represent actual transactions.
MARKET INFORMATION
2003 2002
HIGH LOW HIGH LOW
First Quarter $1.28 $.67 $.79 $.43
Second Quarter 1.40 .61 1.05 .58
Third Quarter 1.35 .60 1.01 .70
Fourth Quarter 1.45 .70 1.20 .55
(b) Approximate Number of Equity Shareholders:
Title of Class: Common Stock, $.01 par value
Approximate Number of Record Holders At March 22, 2004: 695
(c) Dividends:
The Company has never paid a dividend on its common stock and the Board of
Directors intends for the foreseeable future to retain all earnings for use
in the Companys business.
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ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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.
The following table sets forth, for the periods presented, certain income
statement data of the Company expressed as a percentage of revenues:
Percentage of Revenues
2003 2002 2001
Revenues 100.0% 100.0% 100.0%
Cost of sales 69.5 66.2 62.8
Gross profit 30.5 33.8 37.2
Selling, general and
administrative expenses 20.1 21.8 22.7
Research and
Development expenses 9.7 14.5 14.0
Operating income .7 (2.5) .5
Interest expense .3 .5 .6
Income before
income taxes .4 (3.0) (.1)
Income taxes (benefit) (.5) (1.9) (.7)
Net income .9% (1.1)% .6%
Fiscal 2003 Compared to Fiscal 2002
Results of Operations
The Companys revenues in 2003 increased 8% to $11 million from $10.2 million
in 2002. The Company derives its revenues from the sale of standard products
consisting primarily of dataloggers, SatLink transmitters and sensors,
systems and software that are done on a project specific basis, hydrological and
engineering services and airport weather systems.
Revenues from sales to domestic customers increased in 2003 to $7.9 million from
$7.25 million in 2002, an increase of 8.7%. Standard products sales increased
slightly to $5.65 million in 2003 from $5.6 million in 2002. Revenues from
integrated systems and software were down $256 thousand to $1.3 million from
$1.56 million. Revenues for hydrological services increased to $992 thousand
from $110 thousand in 2002 due to the expansion of operations in Florida and
winning five major multi-year contracts in 2002 and 2003 with the South Florida
Water Management District.
Revenues from international sales increased slightly to $3.1 million in 2003
from $2.95 million in 2002. Standard products decreased to $944 thousand
in 2003 from $1.3 million in 2002 due to decreased sales from China. Revenues
from integrated systems and software were up $400 thousand to $2.0 million from
$1.6 million due to several large projects including a $499 thousand
project to provide a rainfall measuring system to the government of Morocco, a
$730 thousand World Meteorological project to provide airport meteorological
systems to 13 small island states in the Caribbean and a $446 thousand standard
product order from a hydropower company in Venezuela. The Company sold its first
airport weather system in 2003 and realized revenue of $71,000.
The Companys largest customer in 2003 and 2002 was the Department
of the Interior, the principal agencies being the US Geological Survey and the
Bureau of Reclamation, which accounted for 28% and 26% of revenues.
Commercial and international revenues represented 55% of revenues in 2003 versus
48% in 2002.
Gross Profit
Gross profit for 2003 decreased 2.7% to $3.36 million from $3.45 million
in 2002. Gross margin as a percentage of revenues for 2002 decreased to
30.5% as compared to 33.8% in 2002. Increased sales of SatLink
transmitters caused a decrease in the Companys margins. The Companys
new SatLink transmitter, the SL2-G312-1, was certified in January 2004
and will significantly improve future margins due to fewer parts
and improved manufacturability. The Companys margins were also
impacted by three projects that were awarded in 2002. Two projects
were with the Government of Andhra Pradesh of India and one project
was with the Meteorological Service of Mexico. All three projects were
bid very competitively. The company completed the Mexico project in
2003. The Government of Andhra Pradesh projects are near completion.
The Company anticipates that these projects will be completed in mid
2004. The Companys gross margin is dependent on product and system
costs, product mix and overhead expenses, all of which fluctuate from
year to year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were level at $2.2 million
in 2003
and 2002. Selling, general and administrative expenses as a percentage of
revenues decreased to 20.8% in 2003 from 21.8% in 2002 due primarily to
the increase in sales.
Research and Development Expenses
Research and development expenses decreased 28% to $1.06 million in
2003 from $1.48 million in 2002. Research and development expenses
as a percentage of revenues decreased to 9.7% in 2003 from 14.5% in
2002. The primary reason for the decrease was the completion of
Xconnect systems software. Upon its completion in late 2002, the
Company transferred several software engineers into direct departments
in order to provide customers with systems and application development
services.
In 2003, the Companys product development focus was on the design and
certification of the SatLink2 in order to enhance the product and
improve margins. The SatLink2 is a high data rate satellite
transmitter that transmits at 100, 300 and 1200 baud,
incorporates GPS and functions as a logger as well. All GOES
satellite 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 effective July 2001. The Company
believes that the SatLink2 will allow it to dominate the replacement
market.
In 2003, the Company continued its development efforts relating to
tidal monitoring applications by introducing enhancements to its
tides monitoring systems. The tides systems are based on the
Xpert and XLite dataloggers and use the SatLink transmitter.
The Company won orders totaling $663 thousand in 2003 and $450
thousand in 2002 for tides systems. The Company also completed
the development of an analog expansion module in 2003.
Other Income (Expense)
Other income and expenses consisted of interest expenses of $30
thousand in 2003 compared with $47 thousand in 2002.
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Fiscal 2002 Compared to Fiscal 2001
Results of Operations
The Companys revenues decreased .5% to $10.2 million from
$10.25 million in 2001.
Revenues from sales to domestic customers decreased in 2002 to $7.25
million from $9.05 million in 2001, a decrease of 19.5%. Export
sales increased to $2.95 million in 2002 from $1.2 million in 2001.
The Company was awarded major international projects in India, China
and Mexico in 2002. The company also made shipments of approximately
$548,000 to customers in Canada in 2002.
Datalogger/Transmitter product sales decreased 27% to $3.6 million in
2002 from $4.95 million in 2001. The decrease was due to weak customer
demand as a result of operational problems with the NOAA/NESDIS GOES
satellite receiving facility and our customers not being able to
obtain satellite station assignments from NESDIS. Systems sales and
services increased 39% to $3.2 million in 2002 from $2.3 million
reflecting the increase in international projects. Sales of sensor
and accessory products increased 14% to $3.3 million from $2.9 million.
Hydrological services revenues were approximately $100,000 in both
years.
The Companys largest customers in each of years 2002 and 2001 was
Department of the Interior, the principal agencies being the
US Geological Survey and the Bureau of Reclamation, which accounted
for 26% and 39% of revenues, respectively. Commercial and international
revenues represented 48% of revenues in 2002 versus 44% in 2001.
Gross Profit
Gross profit for 2002 decreased 9% to $3.45 million from $3.8 million
in 2001. Gross margin as a percentage of revenues for 2002 decreased
to 33.8% as compared to 37.2% in 2001. The decrease in gross margin in
2002 is a result of write-offs of obsolete inventory totaling $180,000
and manufacturing problems relating to the SatLink-G312-1 High Data Rate
satellite transmitter. The Company switched suppliers in mid 2002 in
order to lower costs and improve efficiency of manufacturing the
SatLink-G312-1. The Company began to see improved results in late 2002
The Companys gross margin is dependent on product costs, product mix
and overhead expenses, all of which fluctuate from year to year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 4% to $2.2
million in 2002 from $2.3 million in 2001. Selling, general and
administrative expenses as a percentage of revenues decreased to 21.8%
in 2002 from 22.7% in 2001 due primarily to a reduction in marketing
expenditures and the reduction of one sale position.
Research and Development Expenses
Research and development expenses increased 3% to $1.48 million in
2002 from $1.43 million in 2001. Research and development expenses
as a percentage of revenues increased to 14.5% in 2002 from 14% in 2001.
In 2002, the company released a logger version of the SatLink-G312-1.
The SatLink-G312-1 is a high data rate satellite transmitter that
transmits at 100, 300 and 1200 baud and uses GPS. The logger version
has added the capability to the SatLink unit to function as a logger
for certain datalogging applications. Our GOES satellite 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
effective July 2001.
The Company released the Xpert and XLite
dataloggers in 2001. These dataloggers use Microsoft CE as the
operating system and have enabled the Company to enter closely related
environmental markets such as tides and weather monitoring. The XLite,
a derived product based on the Xpert, has less I/O capability but is
less expensive as well. The Companys development efforts in 2002
were focused primarily on developing tidal monitoring applications
based on these products that were instrumental in winning orders
in 2002 of approximately $471,000 from the National Ocean Survey
for tides systems.
In 2002, the Company released XConnect, a base
station software application that is compatible with leading database
software including Oracle and Microsoft SQL Server. The Company
anticipates significant revenues in 2003 as customers upgrade their
systems software from PC Base II to XConnect.
Other Income (Expense)
Other income and expenses consisted of interest expenses of $47
thousand in 2002 compared with $69 thousand in 2001 .
10
------------------------------------------------------------------------
Liquidity and Capital Resources
The Companys working capital was $3.4 million at December 31, 2003
compared with $3.3 million at December 31, 2002. Cash on hand was
$388,612 at December 31, 2003 compared to $401,740 at December 31, 2002.
Of the cash balance on hand at December 31, 2003, $277,454 was restricted
and serves as collateral for international standby letters of credit at
the Companys previous bank, M&T.
Net cash used by operating activities was $527,652 in the year ended
December 31, 2003 compared to cash provided by operations of $845,428
for the year ended December 31, 2002 and cash provided by operations
of $139,378 for the year ended December 31, 2001.
Net cash used in investing activities was $155,686 for the year ended
December 31, 2003, compared to $53,566 and $162,963 for the years ended
December 31, 2002 and 2001, and was primarily due to purchases of property
and equipment.
Net cash provided by financing activities was $670,210 in 2003 due
borrowings on the line of credit and proceeds from shareholder and term
notes. Net cash used by financing activities was $493,098 for the year
ended December 31, 2002 due to payments on the line of credit and on
term notes. Cash provided by financing activities was $123,762 for
the year ended December 31, 2001 due to proceeds from a term note.
The Company has a revolving credit facility of $500,000 with BB&T Bank.
The credit facility expires on June 30, 2004. The Company believes
that its existing cash resources, cash flow from operations and
short-term borrowings on our existing credit line will provide
adequate resources for supporting operations during fiscal 2004.
ITEM 7 - FINANCIAL STATEMENTS
The financial statements required by this Item 7 are listed in Item
13(a)(1) and begin at page F-1 of this Report.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 8A - CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation of the Companys disclosure controls and procedures
(as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934) as of a date within 90 days of the filing date
of this Annual Report on Form 10-K, the Companys chief executive
officer and chief financial officer have concluded that the Companys
disclosure controls and procedures are designed to ensure that
information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified
in the SEC's rules and forms and are operating in an effective manner.
(b) Changes in internal controls. There were no significant changes
in the Companys internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
most recent evaluation.
11
------------------------------------------------------------------------
PART III
Certain information required by Part III is omitted from this
report because we intend to file a definitive Proxy Statement pursuant to
Regulation 14A no later than 120 days after the end of the fiscal year
covered by this report, and certain information to be included therein is
incorporated herein by reference.
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
The information required by this Item is incorporated by reference
to the Proxy Statement under the sections captioned "Election of
Directors," "Executive Officers," "Executive Compensation",
"Compliance with Section 16(a) of the Securities Exchange Act of 1934",
"Code of Ethics", and "Audit Committee and Audit Committee Financial
Expert".
ITEM 10 - EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference
to the Proxy Statement under the sections captioned "Election of
Directors," "Executive Officers," "Executive Compensation" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934."
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Principal Shareholders," and
"Management Ownership of Common Stock" appearing in the
Proxy Statement, is incorporated herein by reference.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the heading "Certain Transactions," appearing
in the Proxy Statement, is incorporated herein by reference.
ITEM 13 - EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following consolidated financial statements of the Company are
filed as part of this Annual Report on Form 10-KSB as follows:
Report of Independent Auditors F-2
Balance Sheets at December 31, 2003 and 2002 F-3
Statements of Operations for the years ended
December 31, 2003, 2002 and 2001 F-4
Statements of Changes in Stockholders' Equity for the
years ended December 31, 2003, 2002 and 2001 F-5
Statements of Cash Flows for the years ended
December 31, 2003 and 2002 F-6
Notes to Financial Statements F-7
(a)(2) Financial Statement Schedules
Not applicable.
12
------------------------------------------------------------------------
(a)(3) Exhibits
Exhibit No. Description
3(a) Copy of Articles of Incorporation of Sutron Corporation,
received and approved December 30, 1975 (1)
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(1)
3(c) By-laws of the Registrant(1)
3(d) Copy of Articles of Amendment to the Articles of
Incorporation received and approved June 8, 1995(10)
4(a) Specimen Shares of Common Stock Certificate(2)
4(b) Form of Warrant to be issued as part of Unit (2)
4(c) Amended Form of Warrant issued as part of Unit(3)
4(d) Incentive Stock Option Plan dated August 31, 1983(1)
4(e) Stock Bonus Plan dated August 31, 1983(1)
4(f) Loan and Security Agreement, dated December 11, 1992
between the Company and Crestar Bank (8)
4(g) 1996 Stock Option Plan (11)
4(h) 2002 Stock Option Plan (12)
10(a) Employment Agreement dated as of July 1, 1983 with
Kenneth W. Whitt(1)
10(b) Employment Agreement dated as of July 1, 1983 with
Dr. Raul S. McQuivey(1)
10(c) Employment Agreement dated as of July 1, 1983 with
Dr. Thomas N. Keefer(1)
10(d) Employment Agreement dated as of July 1, 1983 with
Duane M. Preble(1)
10(e) Purchase Agreement dated as of July 1, 1983 with Eric
S. Clyde(1)
10(f) Stock Option Agreement between Registrant and Gerald
Calhoun dated July 1, 1983(1)
10(g) Certified Copy of Resolution of Commissioners of
Fairfax
County Economic Development Authority, adopted October 12,
1982, approving $425,000 Industrial revenue bond loan
to registrant(1)
10(h) Certified Copy of Resolution of Commissioners of
Fairfax County Economic Development Authority, adopted
March 8, 1983, approving $400,000 industrial revenue
bond loan to registrant (1)
10(i) Certified Copy of Resolution of Board of Supervisors
of Fairfax County, adopted March 21, 1983, approving
issuance of industrial revenue bonds for purpose of
$400,000 loan to Registrant(1)
10(j) License agreement dated January 29, 1987, with TSUKASA
SOKKEN Co., Ltd. of Japan, to use U.S. Patent No.
3,677,085 (4)
10(k) License agreement dated November 10, 1986, with S.A.
Des Caliberies et Trefileries de Cossonay of
Switzerland, to use U.S. Patent No. 4,279,147 and
Canada Patent No. 1,120,286 (4)
10(l) Lease agreement dated September 18, 1987, with Squire
Court Limited Partnership to lease building space
(9,000 sq. ft.) (4)
10(m) Copy of termination agreement with Duane Preble dated April 1, 1988 (5)
10(n) Sale agreement with National Hospital Health System
Corporation, dated November 29, 1989, and subsequent
amendments dated December 29, 1989, February 28, 1990,
and March 27, 1990, to sell land and building in
Herndon, Virginia (6)
10(o) Lease agreement dated May 9, 1990 with National
Hospital Health SystemCorporation to lease building
space (5545 sq.ft.) (7)
10(p) Stock Option Agreement between Sutron Corporation and
Glenn A. Conover dated October 15, 1990 (7)
10(q) Stock Option Agreement between Sutron Corporation and
Daniel W. Farrell dated October 15, 1990 (7)
10(r) Lease agreement dated July 30, 1992 with Loudoun
Holding Inc. to lease building space (16,794 sq. ft.)
(8)
10(s) Stock Option Agreement between Sutron Corporation and
Ronald C. Dodson dated December 6, 1993 (9)
10(t) Stock Option Agreement between Sutron Corporation and
Raul S. McQuivey dated November 1, 1996 (11)
10(u) Stock Option Agreement between Sutron Corporation and
Glenn A. Conover dated November 1, 1996 (11)
10(v) Stock Option Agreement between Sutron Corporation and
Daniel W. Farrell dated November 1, 1996 (11)
10(w) Stock Option Agreement between Sutron Corporation and
Sidney C. Hooper November 1, 1996 (11)
10(x) Stock Option Agreement between Sutron Corporation and
Raul S. McQuivey dated October 18, 2002 (12)
10(y) Stock Option Agreement between Sutron Corporation and
Daniel W. Farrell dated October 18, 2002 (12)
10(z) Stock Option Agreement between Sutron Corporation and
Sidney C. Hooper October 18, 2002 (12)
10.1 Stock Option Agreement between Sutron Corporation and
Thomas N. Keefer dated October 18, 2002 (12)
10.2 Stock Option Agreement between Sutron Corporation and
Robert F. Roberts, Jr. dated December 18, 2003 (13)
13
------------------------------------------------------------------------
(1) Filed as Exhibits to registrants Registration Statement on Form
S-18 (File No. 2-86573-W) dated September 16, 1983, and
incorporated herein by reference.
(2) Filed as Exhibits to Amendment No. 1 to registrants Registration
Statement on Form S-18 (File No. 2-86573-W) dated October 26,
2983, and incorporated herein by reference.
(3) Filed as Exhibits to Amendment No. 2 to registrants Registration
Statement on form S-18 (File No. 2-896573-W) dated November 4,
1983 and incorporated herein by reference.
(4) Filed as Exhibits to registrants Annual Report on Form 10-K for
the year ended December 31, 1987, and incorporated herein by
reference.
(5) Filed as Exhibit on Form 8-K dated April 1, 1990, and
incorporated herein by reference.
(6) Filed as Exhibits to registrants Annual Report on Form 10-K for
the year ended December 31, 1989, and incorporated herein by
reference.
(7) Filed as Exhibits to registrants Annual Report on Form 10-K for
the year ended December 31, 1990 and incorporated herein by
reference.
(8) Filed as Exhibits to Registrants Annual Report on Form 10-KSB
for the year ended December 31, 1992 and incorporated herein by
reference.
(9) Filed as Exhibits to Registrants Annual Report on Form 10-KSB
for the year ended December 31, 1993 and incorporated herein by
reference.
(10) Filed as Exhibits to Registrants Annual Report on Form 10-KSB
for the year ended December 31, 1995 and incorporated herein by
reference.
(11) Filed as Exhibits to Registrants Annual Report on Form 10-KSB
for the year ended December 31, 1996 and incorporated herein by
reference.
(12) Filed as Exhibits to Registrants Annual Report on Form 10-KSB
for the year ended December 31, 2002 and incorporated herein by
reference.
(13) Filed as Exhibits to Registrants Annual Report on Form 10-KSB
for the year ended December 31, 2003 and incorporated herein by
reference.
14
------------------------------------------------------------------------
(b) Reports on Form 8-K
The registrant did not file any reports on Form 8-K during the fourth
quarter of the fiscal year ended December 31, 2003.
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference
to the Proxy Statement under the sections captioned "Principal
Accountant Fees and Services."
15
------------------------------------------------------------------------
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)
Date: March 30, 2004
By /s/ Raul S. McQuivey Raul S. McQuviey, 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.
Date: March 30, 2004
By /s/ Raul S. McQuivey Raul S. McQuviey, Chairman of
the Board of Directors
and President
Date: March 30, 2004
By /s/ Thomas N. Keefer Thomas N. Keefer,
Director and
Vice President
Date: March 30, 2004
By /s/ Daniel W. Farrell Daniel W. Farrell,
Director and
Vice President
Date: March 30, 2004
By /s/ Sidney C. Hooper Sidney C. Hooper,
Director and
Chief Financial
Officer
Date: March 30, 2004
By /s/ Robert F. Roberts, Jr. Director
16
------------------------------------------------------------------------
SUTRON CORPORATION
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Balance Sheets at December 31, 2003 and 2002 F-3
Statements of Operations for the years ended
December 31, 2003, 2002 and 2001 F-4
Statements of Changes in Stockholders' Equity for the
Years ended December 31, 2003, 2002 and 2001 F-5
Statements of Cash Flows for the years ended
December 31, 2003 and 2002 F-6
Notes to Financial Statements F-7
F-1
------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Sutron Corporation
Sterling, Virginia
We have audited the accompanying balance sheets of Sutron
Corporation as of December 31, 2003 and 2002, and the related
statements of operations, stockholders' equity, and cash flows
for each of the three years ended December 31, 2003, 2002 and 2001.
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 generally
accepted auditing standards. Those standards require that we plan and
perform the audits 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 Corporationas of December 31, 2003 and 2002, and
the results of its operations and its cash flows for each
of the three years ended December 31, 2003, 2002 and 2001
in conformity with generally accepted accounting principles.
Thompson, Greenspon & Co.
/s/ Thompson, Greesspon & Co.
Fairfax, Virginia
February 20, 2004
F-2
------------------------------------------------------------------------
SUTRON CORPORATION
BALANCE SHEETS
(In thousands)
December 31, December 31,
2003 2002
ASSETS
Current assets
Cash and cash equivalents $ 389 $ 402
Accounts receivable 3,062 1,814
Inventory 2,438 2,029
Prepaid items and other 122 183
Deferred income taxes 120 195
----- ------
Total current assets 6,131 4,623
Property, plant and equipment 2,723 2,567
Accumulated depreciation
and amortization (2,126) (1,929)
----- ------
Net property, plant, and
equipment 598 638
----- ------
Income taxes receivable 129 151
Other assets 23 22
----- ------
Total Assets $6,881 $5,434
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $1,044 $ 484
Accrued payroll 50 157
Other accrued expenses 851 591
Line of credit 399 -
Stockholder notes 330 -
Current maturities of
long-term notes 50 93
----- -----
Total current liabilities 2,724 1,325
Long-term notes 100 116
Deferred income taxes 111 142
----- -----
Total liabilities 2,935 1,583
----- -----
Stockholders' equity
Common stock, 43 43
Additional paid-in capital 2,307 2,307
Retained Earnings 1,596 1,501
----- -----
Total stockholders' equity 3,946 3,851
----- -----
Total liabilities and
stockholders' equity $6,881 $5,434
====== =====
See Accompanying Notes to Financial Statements
F-3
------------------------------------------------------------------------
SUTRON CORPORTION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
2003 2002 2001
Revenue $11,016 $10,203 $10,251
Cost of sales 7,659 6,754 6,435
----- ----- -----
Gross profit 3,357 3,449 3,816
Operating expenses:
Selling, general and
administrative expenses 2,218 2,225 2,322
Research and development
expenses 1,066 1,481 1,434
----- ----- -----
Total operating expenses 3,284 3,706 3,756
----- ----- -----
Operating income 73 (257) 60
----- ----- -----
Other income (expense) - - -
Interest expense, net (30) (47) (69)
----- ----- -----
Income before income taxes 43 (304) (9)
Income taxes (benefit) (52) (194) (70)
----- ----- -----
Net income $ 95 $(110) $61
===== ===== =====
Net income per common share $ .02 $(.03) $ .01
Net Income per diluted share $ .02 $(.03) $ .01
See Accompanying Notes to Financial Statements
F-4
------------------------------------------------------------------------
SUTRON CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002, and 2001
(In thousands, except shares data)
COMMON PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAl
-------- --- ------ ----- -----
Balances, December
31,2000 4,293,351 $43 $2,311 $1,550 $3,904
Retirement of
treasury shares (3,800) - (4) - (4)
Net income 61 61
--------- --- ----- ----- -----
Balances, December
31,2001 4,289,551 $43 $2,307 $1,611 $3,961
Net income - - - (110) (110)
--------- --- ----- ----- -----
Balances, December
31,2002 4,289,551 $43 $2,307 $1,501 $3,851
Net income - - - 95 95
--------- --- ----- ----- -----
Balance, December
31, 2003 4,289,551 $43 $2,307 $1,596 $3,946
========= === ====== ====== ======
See Accompanying Notes to Financial Statements
F-5
------------------------------------------------------------------------
SUTRON CORPORTION
STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
2003 2002 2001
Cash flows from operating activities:
Net income $ 95 $(110) $ 61
Non-cash items included in net income:
Depreciation and amortization 196 208 199
Deferred income taxes 75 (51) 8
Payments on deferred taxes (31) - -
Changes in current assets and
liabilities:
Accounts receivables (1,248) 102 113
Inventory (409) 531 142
Prepaid items and other (91) (121) 361
Income taxes receivable 173 68 (80)
Other assets (1) (8) -
Accounts payable 560 28 (590)
Accrued expenses 153 199 (75)
----- ----- -----
Net cash provided by operating activities (528) 846 139
Cash flows from investing activities:
Purchase of property and equipment (156) (54) (163)
----- ----- -----
Net cash used by investing activities (156) (54) (163)
Cash flows from financing activities:
Proceeds from term notes payable 166 - 246
Proceeds from stockholder notes 330 - -
Proceeds from line of credit, net 399 - -
Payments on line of credit, net - (375) (31)
Payments on term notes payable (224) (118) (87)
Payments for purchase of treasury stock - - (4)
----- ----- -----
Net cash used by financing activities (671) (493) 124
Net increase (decrease) in cash and
cash equivalents (13) 299 100
Cash and cash equivalents, beginning
of year 402 103 3
----- ----- -----
Cash and cash equivalents, end of year $389 $402 $103
===== ===== =====
See Accompanying Notes to Financial Statements
F-6
------------------------------------------------------------------------
SUTRON CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Sutron Corporation ("the Company") was incorporated
on December 30, 1975 under the General Laws of the
Commonwealth of Virginia. The Company designs,
manufactures and markets hydrological and
meteorological monitoring and control products and
systems. The Companys products consist primarily
of dataloggers, satellite transmitters and sensors.
The Company provides turnkey integrated systems
including systems software that are done on a
project specific basis, hydrological and
engineering services and airport weather systems
solutions. The Companys customers include a diversified
base of Federal, state, local and foreign governments,
universities, engineering firms and hydropower companies.
Revenue Recognition
The Company utilizes the accrual method of
accounting for both financial statement and tax
return reporting purposes. The Company recognizes
revenue from product sales upon shipment. Selling,
general, and administrative expenses are charged
against periodic income as incurred. Revenue
from cost-plus-fee contracts is recognized to the
extent of costs incurred, plus a proportionate
amount of fees earned. Revenue from fixed-price
contracts is recognized on the
percentage-of-completion method based on costs
incurred in relation to total estimated costs.
Revenue from time-and-materials contracts is
recognized to the extent of billable rates, times
hours delivered, plus materials costs incurred.
Contract costs include allocated indirect costs
and general and administrative expenses.
Anticipated losses are recognized as soon as
they become known.
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 amounted to $29,778, $48,936 and
$75,815 in 2003, 2002 and 2001, respectively. Income
taxes paid amounted to $0 in 2003 and 2002, and
$50,000 in 2001.
The Company has entered into certain international
contracts that require provision of letters of guarantee
to the customer until acceptance of the system by the
customer. Standby irrevocable letters of credit were
issued by the Companys previous bank that do not expire
until March 2005. As of December 31, 2003, $277,454 of
the cash and cash equivalents balance is restricted and
is held as security by M&T Bank for these standby letters
of credit.
Property, Plant and Equipment
Equipment is recorded at cost and depreciated over
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
which do not materially extend the useful lives of
the assets are charged to earnings. When items of
property, plant, 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.
F-7
------------------------------------------------------------------------
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 Companys
income tax return and the deferred tax liabilities
and assets for the expected future tax consequences
of events that have been recognized in the Companys
financial statements or tax returns.
The assets and liability method accounts for deferred
income taxes by applying enacted statutory rates to
temporary differences, the difference between
financial statement amounts and tax bases 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.
Financial Instruments
The estimated fair value of cash and cash equivalents,
accounts receivable, accounts payable and accrued
expenses and short term notes receivable 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 $100,000 and $116,000 at December 31, 2003 and
2002, respectively.
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities
at the date of the financial statements and the
reported amounts of 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 4,289,551 shares issued and
outstanding at December 31, 2003, 2002 and 2001.
The Companys Board of Directors has authorized the
repurchase of up to 100,000 shares of its common
stock in open market transactions. As of
December 31, 2003, 13,800 shares have been repurchased.
Earnings Per Share
The Company has adopted Statement of Financial
Accounting Standards ("SFAS") No. 128 which 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. Contracts to issue common
stock which are antidilutive in nature are not
included in the earnings per share calculations.
Shares used in the computations for the years
ended December 31, 2003, 2002 and 2001 are as
follows (in thousands):
Years Ended December 31,
2003 2002 2001
Weighted average shares used in 4,290 4,290 4,292
Basic computation
Common stock equivalents-options 185 -- --
Weighted average shares used in 4,475 4,290 4,292
Diluted computation
F-8
------------------------------------------------------------------------
2. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, consists of the
following (in thousands):
2003 2002
Current $1,712 $1,790
Unbilled 1,350 24
Totals $ 3,062 $1,814
3. INVENTORY
Inventory is stated at the lower of cost or market.
Electronic components and work in process and finished goods
Costs consisting of materials, labor and overhead are
Recorded at a standard cost. Inventory consists of the
following at December 31 (in thousands):
2003 2002
Electronic components $ 992 $ 658
Work in process 924 852
Finished goods 522 519
Totals $ 2,438 $2,029
4. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment at
December 31, is as follows (in thousands):
2003 2002
Furniture and equipment $2,526 $2,419
Vehicles 120 77
Leasehold improvements 77 71
$2,723 $2,567
Depreciation and amortization expenses totaled
$196,205, $207,567 and $199,597, for the years
ended December 31, 2003, 2002, and 2001,
respectively.
Accumulated depreciation and amortization at
December 31, is as follows (in thousands):
2003 2002
Furniture and equipment $2,029 $1,848
Automotive equipment 66 55
Leasehold improvements 31 26
Totals $2,126 $1,929
5. LINE OF CREDIT
In July 2003, the Corporation signed a loan and security
agreement with its bank, BB&T, which extends to the
Corporation a revolving line of credit. The maximum amount
of borrowing under the line is $500,000. Interest on the
unpaid balance is payable monthly at prime plus one percent
(5.25 percent at December 31, 2003). The line of credit
had a balance of $399,454 at December 31, 2003 and matures
on June 30, 2004.
6. NOTES PAYABLE - STOCKHOLDERS
The Company has notes payable to three stockholders that
are unsecured, accrue interest at 7.25 percent per annum
and are payable on April 12, 2004. Interest expenses
related to these notes were $7,395 for the year ended
December 31, 2003.
F-9
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7. NOTES PAYABLE
Notes payable consists of the following at December 31
(in thousands):
2003 2002
Bank note payable of $147,189; dated July 25, 2003;
secured by substantially all the assets of the
Corporation and guaranteed by the directors of the
Corporation; interest accrues at 6.750% per annum;
payable in monthly installments of $4,528; and
matures August 1, 2006 $132 $ -
Vehicle note payable is secured by the underlying
vehicle; is non-interest bearing; payable in
monthly installments of $259; and matures
September 9, 2009 18 -
Bank note payable; dated May 2001; secured by
substantially all the assets of the Corporation
and guaranteed by the directors of the Corporation;
interest accrues at 8.22% per annum; payable in
monthly installments of $5,135; and matures
June 2005 - 154
Bank note payable; dated July 2000; secured by
substantially all the assets of the Corporation
and guaranteed by the directors of the Corporation;
interest accrues at 10% per annum; payable in
monthly installments of $2,632; and matures
October 2004 - 55
______ ______
Total notes payable outstanding 150 209
Current maturities 50 93
______ ______
Long-term maturities $100 $ 116
====== ======
Principal maturities for all indebtedness described in Notes
5, 6 and 7 are as follows at December 31 (in thousands):
Year ending December 31:
2004 $779
2005 53
2006 39
2007 3
2008 3
Thereafter 2
---
Total $879
===
F-10
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8. LEASE OBLIGATIONS
The Company signed a lease for its headquarters and production
facilities that expires on March 31, 2006. The operating lease
calls for monthly rent of $14,894 including $4,230 estimated
as the Companys pro rata share of operating expenses and
annual rent increases of 3 percent. Rent expense amounted
to $274,000, $268,000, and $275,000 for the years ended
December 31, 2003, 2002 and 2001, respectively.
The Company entered into a lease agreement for additional
office and warehouse space in Sterling, Virginia. The lease
renewed on March 26, 2003, requires monthly payments of $5,275
and and expires on March 31, 2006. The Company entered into a
lease agreement for office and warehouse space in West Palm
Beach, Florida. The four-year lease, expiring in October 2006,
requires monthly payments of $3,599 and annual rent increases
of 4 percent. 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
annual increases of 4 percent. The following is a schedule, by
years, of future minimum rent payments due (in thousands):
Year ending December 31:
2004 $266
2005 266
2006 84
2007 24
2008 24
Total $664
9. INCOME TAXES
The income tax (benefit) expense charged to
operations for the years ended December 31, were as
follows (in thousands):
2003 2002 2001
Current income tax (benefit) expense $ (96) $(143) $(78)
Deferred tax benefit 44 (51) 8
_____ _____ ____
Total tax (benefit) expense $ (52) $(194) $ (70)
==== ===== ====
Deferred tax assets, are comprised of the
following at December 31 (in thousands):
2003 2002 2001
Accrued vacation and warranty $120 $75 $100
Net operating loss carryforward - 120 47
_____ _____ ____
Gross deferred tax assets 120 195 147
Gross deferred tax liability -
depreciation (111) (141) (145)
_____ _____ ____
Net $ 9 $ 53 $ 2
==== ===== ====
The realization of the deferred tax assets and receivables
of $346,000 is dependent on future taxable earnings. The
Company has not provided for a deferred tax asset valuation
allowance due to their anticipation of future earnings and
therefore management's estimate that the deferred tax
assets and receivables will ultimately be realized.
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 (in thousands):
2003 2002 2001
Income before income taxes $ 43 $(304) $ (9)
Applicable statutory tax rate 34% 34% 34%
Computed "expected" Federal tax
expense 15 (104) (3)
Adjustments to Federal income tax
resulting from:
State income tax 2 (18) 3
Tax credits (69) (72) (70)
Change in valuation allowance -- -- --
Income tax (benefit) expense $ (52) $ (194) $ (70)
The Company has Federal and state net operating loss
carryforwards available approximating $300,000 which expire,
if not used, in 2022. The Company also has unused general
business tax credits, relating to research and development
costs, approximating $221,000, that were
generated in years 2000 through 2003, respectively. These tax
credits expire, if not used, in the years 2020 through 2023.
F-11
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10. MAJOR CUSTOMERS
Set forth below are customers, including agencies
of the U.S. Government, from which the Company
received more than 10 percent of total revenue,
for the years ended December 31:
2003 2002 2001
Department of Interior 27% 26% 39%
International 28% 29% 12%
Commercial 27% 19% 30%
Department of Defense 10% 17% 15%
11. CONCENTRATIONS OF CREDIT RISK
At times throughout the year, cash and cash
equivalents exceeded FDIC insurance limits.
As of December 31, 2003 and 2002, the Companys cash
deposits exceeded the FDIC insured amount
by approximately $405,000 and $316,000.
12. STOCK OPTIONS PLANS
Stock Options
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. Current grants under the plan are
259,00 shares. Under the 1997 Stock Option Plan, the
Company authorized 60,000 shares. Current grants under
the plan are 60,000 shares. Under the 2002 Stock Option
Plan, the Company authorized 400,000 shares. Current
grants under the plan total 390,000 shares. 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.
The following summarizes the option activity under these
plans for the last three years (in thousands):
Number of Option Price
Shares
(in thousands) Per Share
Outstanding, December 31, 2000 255 $1.125
Grants 25 .62
Exercised -- --
Canceled or expired (10) 1.125
_____ ___________
Outstanding at Decembr 31, 2001 270 .62 - 1.l25
Grants 347 .55
Exercised - -
Canceled or expired (88) .62 - 1.125
_____ ___________
Outstanding, December 31, 2002 529 .40 - 1.125
Grants 180 .68 - .75
Exercised - -
Canceled or expired - -
_____ ___________
Outstanding, December 31, 2003 709 $.40-1.125
===== ===========
The vesting period of the remaining options
is as follows:
Vested and exercisable 261
January 1, 2004 104
January 1, 2005 104
January 1, 2006 103
January 1, 2007 103
January 1, 2008 34
____
Total 709
====
The Company adopted the disclosure-only provisions
of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation
and will continue to apply Accounting Principles
Board Statement No. 25 and related interpretations
in accounting for its employee compensation plans.
SFAS 123 establishes standards of financial
accounting and reporting for stock-based employee
compensation plans including stock option plans,
stock purchase plans and other arrangements by
which employees receive shares of stock or other
equity instruments based on the market price of
an entitys stock.
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 and the with the
following assumptions: a risk free interest rate of 5.0
percent, no estimated dividend yield, an expected
volatility of 30 percent and an expected holding
period of five years.
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:
2003 2002 2001
Net income
As reported $ 95 $ (110) $ 61
Pro forma 88 (154) 59
Earnings per share
As reported $ .02 $(.03) $ .01
Pro forma $ .02 $(.04) $ .01
F-12
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13. PROFIT SHARING PLAN
The 401 (k) Profit Sharing Plan covers substantially
all full time employees. The contributions, if any,
to the plan will be determined each year by the
Board of Directors based on profits. The Company did
not make any profit sharing contributions for the years
ended December 31, 2003, 2002 and 2001.
14. EXPORT SALES
Export sales from the Companys operations
were as follow (in thousands):
Year ended December 31,
2003 2002 2001
Central and South America $ 1,597 $ 247 $ 432
Canada 175 548 81
Asia 850 1,955 377
Australia/New Zealand 35 35 33
Europe and other 415 162 298
_______ ______ ______
$3,072 $2,947 $1,221
======= ====== ======
15. SEGMENT INFORMATION
The Company currently reports its results in four
divisions, Hydromet Products, Integrated Systems,
Hydrological Services and Airport Weather Systems.
Hydromet Products division is responsible for the
manufacture and sale of the Companys products
including dataloggers, satellite transmitters and
sensors. The Integrated Systems division is
responsible for systems design, integration and
installation of turnkey hydrometeorological systems.
The Companys Hydrological Services division provides
data interpretation and analysis services including
modeling, flood forecasting and hydrologic studies.
The Airport Weather Systems division provides systems
design, integration and installation of airport
meteorological monitoring systems. The results of
these segments are shown below (in thousands):
Years Ended December 31,
2003 2002 2001
Revenue
Hydromet Products $ 6,592 $ 6,898 7,804
Integrated Systems 3,361 3,195 2,447
Hydrological Services 992 110 -
Airport Weather Systems 71 - -
______ ______ ______
Totals $11,016 $10,203 $10,251
Cost of Goods Sold
Hydromet Products $4,414 $4,500 $4,592
Integrated Systems 2,360 2,144 1,843
Hydrological Services 804 110 -
Airport Weather Systems 81 - -
______ ______ ______
Totals $7,659 $6,754 $6,435
Gross Margin
Hydromet Products $2,178 $2,398 $3,212
Integrated Systems 1,001 1,051 604
Hydrological Services 188 - -
Airport Weather Systems (10) - -
______ ______ ______
Totals $3,357 $3,449 $3,816
====== ====== ======
F-13
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16. Summary of Quarterly Results (unaudited)
Summarized quarterly supplemental financial information for 2003 and
2002 is as follows:
Quarter Ended
(In thousands, except per share data) March 31, June 30, September 30, December 31,
2003
Revenues $2,259 $2,819 $2,230 $3,708
Gross profit 493 992 576 1,296
Operating income (loss) (475) 183 (181) 546
Net income (283) 129 (104) 353
Basic earnings per share $(.07) $ .03 $(.02) $.08
Diluted earnings per share $(.07) $ .03 $(.02) $.08
2002
Revenues $1,303 $2,284 $2,532 $4,084
Gross profit 452 804 733 1,460
Operating income (loss) (437) (67) (187) 434
Net income (267) (33) (113) 303
Basic earnings per share $(.06) $(.01) $(.03) $.07
Diluted earnings per share $(.06) $(.01) $(.03) $.07
F-13
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