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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM 10-QSB
_____________
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2005
COMMISSION FILE NUMBER: 0-12227
SUTRON CORPORATION
-----------------------------------------------------------
(Name of small business issuer as specified in its charter)
VIRGINIA 54-1006352
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
21300 RIDGETOP CIRCLE, STERLING, VIRGINIA 20166
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(Address of principal executive offices)
703-406-2800
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(Issuer's telephone number)
Securities registered under Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
-----------------------------
(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the issuer was required to file such reports); and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
There were 4,289,551 outstanding shares of the issuer's only class of common
equity, Common Stock, $0.01 par value, on August 12, 2005.
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SUTRON CORPORATION
FORM 10-QSB QUARTERLY REPORT
FOR THE QUARTER ENDED JUNE 30, 2005
TABLE OF CONTENTS
PART I
Financial Statement Item.......................................................2
Consolidated Financial Statements..............................................2
Consolidated Balance Sheet as of June 30, 2005
and December 31, 2004........................................................2
Consolidated Income Statements for the Three
Months Ended June 30, 2005 and 2004..........................................3
Consolidated Income Statements for the Six
Months Ended June 30, 2005 and 2004..........................................4
Consolidated Cash Flow Statements for the Six
Months Ended June 30, 2005 and 2004..........................................5
Financial Footnotes............................................................6
Management Discussion..........................................................7
Controls and Procedures.......................................................12
PART II
Legal Proceedings.............................................................13
Submission of Matters to a Vote
Of Security Holders.........................................................14
Exhibits......................................................................14
Reports on Form 8-K...........................................................15
Signatures....................................................................15
1
PART I. CONDENSED FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SUTRON CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2005 2004
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $ 439,313 $ 1,419,171
Accounts receivable 4,078,853 3,755,439
Inventory 2,883,952 2,371,476
Prepaid items and other 487,186 270,014
Deferred income taxes 179,000 179,000
------------ ------------
Total Current Assets 8,068,304 7,995,100
Property and equipment, at cost 3,139,055 3,038,168
Less - Accumulated depreciation and
amortization (2,448,497) (2,328,496)
------------ ------------
Net property, plant and equipment 690,558 709,672
Other assets 49,923 51,133
------------ ------------
TOTAL ASSETS $ 8,808,785 $ 8,755,905
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 971,828 $ 943,616
Accrued payroll 95,715 272,601
Other accrued expenses 1,089,586 1,400,779
Accrued income taxes
Notes payable - current 35,263 25,613
------------ ------------
Total Current Liabilities 2,192,392 2,642,609
Long-Term Liabilities
Notes payable, net of current
maturities 67,717 89,666
Deferred income taxes 172,000 172,000
------------ ------------
Total Liabilities 2,432,109 2,904,275
Stockholders' Equity
Common stock 42,896 42,896
Additional paid-in capital 2,306,655 2,306,655
Retained earnings 4,022,200 3,497,930
Accumulated other comprehensive income 4,925 4,149
------------ ------------
Total Stockholders' Equity 6,376,676 5,851,630
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,808,785 $ 8,755,905
============ ============
See Accompanying Notes to Financial Statements
2
SUTRON CORPORTION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
June 30,
2005 2004
------------ ------------
Revenues $ 3,157,884 $ 4,073,841
Cost of Goods Sold 1,902,923 2,392,705
------------ ------------
Gross Profit 1,254,961 1,681,136
Research and Development Expenses 371,174 252,003
Selling, General, and Administrative Expenses 682,607 574,167
------------ ------------
Income (Loss) from Operations 201,180 854,966
Interest income (expense) 4,799 (8,968)
------------ ------------
Income (Loss) before Provision for Income Taxes 205,979 845,998
Provisions for Income Taxes 74,000 309,000
------------ ------------
Net Income $ 131,979 $ 536,998
============ ============
Net Income per Common Share $ .03 $ .13
============ ============
Weighted Average Number of Common Shares 4,289,551 4,289,551
============ ============
See Accompanying Notes to Financial Statements
3
SUTRON CORPORTION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended June 30,
----------------------------
2005 2004
------------ ------------
Revenues $ 7,051,817 $ 7,801,069
Cost of Goods Sold 4,142,193 4,754,806
------------ ------------
Gross Profit 2,909,624 3,046,263
Research and Development Expenses 680,668 499,898
Selling, General, and Administrative Expenses 1,413,345 1,120,910
------------ ------------
Income (Loss) from Operations 815,611 1,425,455
Interest income (expense) 8,659 (24,179)
------------ ------------
Income (Loss) before Provision for Income Taxes 824,270 1,401,276
Provisions for Income Taxes 300,000 499,000
------------ ------------
Net Income $ 524,270 $ 902,276
============ ============
Net Income per Common Share $ .12 $ .21
============ ============
Weighted Average Number of Common Shares 4,289,551 4,289,551
============ ============
See Accompanying Notes to Financial Statements
4
SUTRON CORPORTION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
----------------------------
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 524,270 $ 902,276
Depreciation and amortization 120,000 108,000
(Increase) Decrease in:
Accounts receivables (323,414)
Inventory (512,476) 140,356
Prepaid items and other (217,172) 166,110
Deferred income taxes 0 (60,658)
Other assets 1,210 (1,000)
Increase (Decrease) in:
Accounts payable 28,212 (380,482)
Accrued expenses (488,079) 698,197
------------ ------------
Net Cash Provided by Operating Activities (867,448) 326,795
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (100,887) (137,049)
------------ ------------
Net Cash Used in Investing Activities (100,887) (137,049)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit -- (120,301)
Payments on Term notes payable (12,299) --
Payments on shareholder notes payable -- (200,000)
Proceeds from term notes payable -- 12,752
------------ ------------
Net Cash (Used) by Financing Activities (12,299) (307,549)
CURRENCY ADJUSTMENTS
Effect of exchange rate changes on cash 776 --
------------ ------------
Net Increase (Decrease) in Cash (979,858) (117,803)
Cash and Cash Equivalents, January 1 1,419,171 388,612
------------ ------------
CASH AND CASH EQUIVALENTS, JUNE 30 $ 439,313 $ 270,809
============ ============
See Accompanying Notes to Financial Statements
5
SUTRON CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005
1. BASIS OF PRESENTATION
The accompanying financial statements, which should be read in conjunction with
the financial statements of Sutron Corporation ("the Company") included in the
2004 Annual Report filed on Form 10-KSB, are unaudited but have been prepared in
the ordinary course of business for the purpose of providing information with
respect to the interim period. The Company believes that all adjustments (none
of which were other than normal recurring accruals) necessary for a fair
presentation for such periods have been included.
2. 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 earning 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.
COMPUTATION OF PER SHARE EARNINGS
THREE MONTHS ENDED JUNE 30,
---------------------------
2005 2004
---------- ----------
BASIC EPS:
Average shares outstanding 4,289,551 4,289,551
Net Income $ 131,979 $ 536,998
Net Income per common share $ .03 $ .13
DILUTIVE EPS:
Average shares outstanding 4,289,551 4,289,551
Effect of dilutive securities 631,664 535,783
Total average shares outstanding 4,921,215 4,825,324
Net earnings $ 131,979 $ 536,998
Net income per diluted share $ .03 $ .11
SIX MONTHS ENDED JUNE 30,
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2005 2004
---------- ----------
BASIC EPS:
Average shares outstanding 4,289,551 4,289,551
Net Income $ 524,270 $ 902,276
Net Income per common share $ .12 $ .21
DILUTIVE EPS:
Average shares outstanding 4,289,551 4,289,551
Effect of dilutive securities 640,849 535,783
Total average shares outstanding 4,930,400 4,825,334
Net earnings $ 524,270 $ 902,276
Net income per diluted share $ .11 $ .19
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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Statements made in this Report on Form 10-QSB, including without limitation this
Management's Discussion and Analysis of Financial Condition and Operations,
other than statements of historical information, are forward looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements may sometimes be identified by such words as "may,"
"will," "expect," "anticipate," "believe," "estimate" and "continue" or similar
words. We believe that it is important to communicate our future expectations to
investors. However, these forward-looking statements involve many risks and
uncertainties. Our actual results could differ materially from those indicated
in such forward-looking statements as a result of certain factors. We are under
no duty to update any of the forward-looking statements after the date of this
Report on Form 10-QSB to conform these statements to actual results.
Sutron Corporation (the Company) was incorporated on December 30, 1975 under the
General Laws of the Commonwealth of Virginia. 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 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 disastrous floods or
storms and for the optimization of hydropower plants.
The Company 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 collection and control products consisting primarily
of dataloggers, satellite transmitters/loggers and sensors. Second, we provide
turnkey integrated systems for hydrological and meteorological networks and
airport weather systems. Third, we provide site installation, equipment
maintenance, flow monitoring, science and engineering and other related
engineering services in support of our customers. The Company's customers
include a diversified base of federal, state, local and foreign governments,
engineering companies, universities, and hydropower companies.
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 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.
Anticipated losses are recognized as soon as they become known.
Our revenue and operating results are subject to substantial variations based on
our customers' expenditures and the frequency with which we are chosen to
perform services for our customers. Revenue from any given customer will vary
from period to period. Our gross margins are affected by the product mix and can
vary substantially based on quantities and contract requirements.
7
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and notes
thereto and the other financial information included elsewhere in this Report on
Form 10-QSB.
RESULTS OF OPERATIONS
---------------------
THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THREE MONTHS ENDED JUNE 30, 2004
The following table sets forth for the periods indicated the percentage of total
revenues represented by certain items reflected in our statements of operations:
Three Months Ended June 30,
---------------------------
2005 2004
---------- ----------
Revenues 100.0% 100.0%
Cost of sales 60.3 58.7
---------- ----------
Gross profit 39.7 41.3
Selling, general and administrative expenses 21.6 14.1
Research and Development expenses 11.7 6.2
---------- ----------
Operating income 6.4 21.0
Interest income (expense) .1 (.2)
Income before income taxes 6.5 20.8
Income taxes (benefit) 2.3 7.6
---------- ----------
Net income 4.2% 13.2%
========== ==========
The Company's revenues for the three months ended June 30, 2005 decreased 22.5%
to $3,157,884 from $4,073,841 in 2004. The Company had expected to receive two
large international contracts in 2005 that would have had a significant impact
on the second quarter revenues and operating income. These two contract awards
are still under review by the purchasers and Sutron is in the process of
negotiation with the purchasers. The Company anticipates that the reviews and
negotiations will be completed and that the awards will be made during the third
quarter of 2005 although no assurances can be made that the contracts will be
awarded to Sutron during the third quarter.
Company revenues are broken down between the Company's operating divisions or
profit centers which include the HydroMet Products Division, the Integrated
Services Division which includes Special Projects and the Company's India Branch
Office, the Hydrological Services Division and the Airport Weather Systems
Division. The HydroMet Products Division, which is responsible for sales of
standard products, had a revenue decrease of 25.5% to $2,022,221 from $2,715,308
in 2004. In 2004, the Company shipped approximately $1,028,000 of standard
product to a Canadian consortium for a project in Poland. There were not any
similar sized international project shipments in 2005. Integrated Systems
revenues decreased 50% to $410,504 from $850,609 in 2004 due to a decrease in
international project deliveries. Revenues from the Hydrological Services
Division increased 42.8% to $725,159 from $507,923 in 2004 due to increased
contract awards primarily from the South Florida Water
8
Management District. Airport Weather Systems did not have second quarter
revenues in 2005 or 2004.
Overall domestic revenues decreased 2.3% to $2,425,079 in the second quarter of
2005 versus $2,481,263 in 2004 while international revenues decreased 54% to
$732,805 in 2005 versus $1,592,577 in 2004. Customer orders or bookings for the
second quarter of 2005 were $3,143,434 as compared to $4,763,775 in the second
quarter of 2004.
Cost of sales as a percentage of revenues was 60.35% for the quarter ended June
30, 2005 as compared to 58.7% for the quarter ended June 30, 2004. The increase
in cost of sales reflects the lower sales volume that reduces fixed costs
absorption. The sales volume decrease was partially offset by improvements in
manufacturing efficiencies. Cost of sales for both 2005 and 2004 include
provisions for inventory obsolescence, physical inventory adjustments and
inventory valuation adjustments. Cost of sales includes $18,912 of estimated
profit sharing expenses in 2005 as compared to $0 in 2004. The Company is
aggressively pursuing 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 increased to $682,607 in 2005 from
$574,167 in 2004, an increase of $108,440 or 19%. The Company experienced
significant increases in insurance, legal fees, selling and marketing activities
and international agent commissions. An increase of approximately $34,000 for
international agent commissions was the most significant. The Company also
recorded expenses totaling approximately $8,000 for the estimated profit sharing
contribution for 2005 that is reflected in selling, general and administrative
expenses as compared to $0 in 2004.
Research and development expenses increased to $371,174 in 2005 from $252,003 in
2004, an increase of $119,171 or 47%. In 2005, the Company has sourced
significant work to a subcontractor for work on next generation products. In
2004, significant engineering labor was performed on the Hanscom Air Force Base
FMQ-13(V)2 Wind Sensor Replacement contract and on customer funded software
customization of the 9210 datalogger which was direct billable work versus R&D
engineering work. This resulted in lower R&D expenses.
Due to the Company's cash position, the Company did not use its line of credit
during the second quarter of 2005. The Company had interest income in 2005 of
$4,799 as compared with interest expenses of $8,968 in 2004.
Income taxes decreased 76% in 2005 to $74,000 from $309,000 in 2004 due to the
decrease in operating income. Taxes as a percentage of revenue were 2.3% in 2005
as compared to 7.6% in 2004. The provisions for income taxes represent effective
tax rates of approximately 37% in 2005 and 2004, respectively.
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004
The following table sets forth for the periods indicated the percentage of total
revenues represented by certain items reflected in our statements of operations:
9
Six Months Ended June 30,
---------------------------
2005 2004
---------- ----------
Revenues 100.0% 100.0%
Cost of sales 58.7 61.0
---------- ----------
Gross profit 41.3 39.0
Selling, general and administrative expenses 20.1 14.4
Research and Development expenses 9.6 6.4
---------- ----------
Operating income 11.6 18.3
Interest income (expense) .1 (.3)
Income before income taxes 11.7 18.0
Income taxes (benefit) 4.3 6.4
---------- ----------
Net income 7.4% 11.6%
========== ==========
The Company's revenues for the six months ended June 30, 2005 decreased 9.6% to
$7,051,817 from $7,801,069 in 2004. The Company had expected to receive two
large international contracts in 2005 that would have had a significant impact
on the revenue and operating income for the six months ended June 30, 2005.
These two contract awards are still under review by the purchasers and Sutron is
in the process of negotiation with the purchasers. The Company anticipates that
the reviews and negotiations will be completed and that the awards will be made
during the third quarter of 2005 although no assurances can be made that the
contracts will be awarded to Sutron during the third quarter.
The HydroMet Products Division had a revenue decrease of 22.7% to $3,805,001
from $4,924,916 in 2004. In 2004, the Company shipped approximately $1,636,000
of standard product to a Canadian consortium for a project in Poland. There were
not any similar sized international project shipments in 2005. Increased
domestic shipments partially offset this decrease. Integrated Systems revenues
decreased 17% to $1,654,797 from $1,986,970 in 2004 due to decreased
international project deliveries. Revenues from the Hydrological Services
Division increased 40.5% to $1,237,330 from $880,783 in 2004 due to increased
contract awards primarily from the South Florida Water Management District.
Airport Weather Systems' revenues increased to $354,689 in 2005 as compared to
$8,400 in 2004 due to deliveries of systems to the Meteorological Service of the
Netherlands Antilles and Aruba.
Overall domestic revenues increased 3.4% to $4,690,675 in 2005 versus $4,534,320
in 2004 while international revenues decreased 28% to $2,361,142 in 2005 versus
$3,266,749 in 2004. Customer orders or bookings for 2005 were $6,168,691 as
compared to $8,911,613 in 2004. The Company's backlog of orders at June 30, 2005
was $4,661,670 as compared with $5,503,328 as of June 30, 2004. The Company
anticipates that 70% of its backlog as of June 30, 2005 will be shipped in 2005.
Cost of sales as a percentage of revenues was 58.7% in 2005 as compared to 61.0%
in 2004. The sales volume decrease was offset by improvements in manufacturing
efficiencies and the mix of products sold. Cost of sales for both 2005 and 2004
include provisions for inventory obsolescence, physical inventory adjustments
and inventory valuation adjustments. Cost of sales includes $47,325 of estimated
profit sharing expenses in 2005 as compared to $0 in 2004. The Company is
aggressively pursuing product cost reductions
10
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 increased to $1,413,345 in 2005
from $1,120,910 in 2004, an increase of $292,435 or 26%. The Company experienced
significant increases in insurance, legal fees, banking fees, selling and
marketing activities and international agent commissions. Increases of
approximately $40,000 for legal fees and $38,000 for international agent
commissions were the most significant. The Company also recorded expenses
totaling approximately $22,000 for the estimated profit sharing contribution for
2005 that is reflected in selling, general and administrative expenses as
compared to $0 in 2004.
Research and development expenses increased to $680,668 in 2005 from $499,898 in
2004, an increase of $180,770 or 36%. In 2005, the Company has sourced
significant work to a subcontractor for work on next generation products. In
2004, significant engineering labor was performed on the Hanscom Air Force Base
FMQ-13(V)2 Wind Sensor Replacement contract and on customer funded software
customization of the 9210 datalogger which was direct billable work versus R&D
engineering work. This resulted in lower R&D expenses.
Due to the Company's cash position, the Company has not used its line of credit
during 2005. The Company had interest income in 2005 of $8,659 as compared with
interest expenses of $24,179 in 2004.
Income taxes decreased 40% in 2005 to $300,000 from $499,000 in 2004 due to the
decrease in operating income. Taxes as a percentage of revenue were 4.3% in 2005
as compared to 6.4% in 2004. The provisions for income taxes represent effective
tax rates of approximately 36% in 2005 and 2004, respectively.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's working capital was $5,875,912 at June 30, 2005 compared with
$5,352,491 at December 31, 2004. Cash on hand was $439,313 at June 30, 2005
compared to $1,419,171 at December 31, 2004. The cash decrease is due to a
buildup of inventory in anticipation of expected customer business, the payment
of final tax amounts for 2004 and the payment of estimated quarterly tax
payments in 2005. In 2004, the Company was not required to make significant
estimated quarterly tax payments. Of the cash balance on hand at June 30, 2005,
$102,820 was restricted and served as bid bonds on international tenders. Of the
cash balance on hand at December 31, 2004, $277,454 was restricted and served as
collateral for international standby letters of credit and $108,568 was
restricted and served as bid bonds on international tenders.
Net cash used by operating activities was $867,448 for the six months ended June
30, 2005 as compared to cash provided by operating activities of $326,795 for
the six months ended June 30, 2004.
Net cash used by investing activities was $100,887 for the six months ended June
30, 2005 as compared to cash used by investing activities of $137,049 for the
six months ended June 30, 2004, and was primarily due to purchases of property
and equipment.
Net cash used by financing activities was $12,299 for the six months ended June
30, 2005 due to payments on installment notes. Net cash used by
11
financing activities was $307,549 for the six months ended June 30, 2004 due to
payments on the line of credit and on shareholder notes totaling $200,000. The
Company's line of credit of $1,625,000 with a commercial bank expired on August
5, 2005. The Company expects the line of credit to be renewed with its current
bank for a one year period at a higher amount. The line of credit will be
collateralized by substantially all of the assets of the Company. Under the
expected terms of the line of credit, the Company is required to maintain
certain financial covenants. Interest is expected to be charged at the bank's
prime rate plus one-half percent and is payable monthly. There was no bank
balance outstanding at June 30, 2005 and at December 31, 2004.
The Company frequently bids on and enters into international contracts that
require bid and performance bonds. At June 30, 2005 and December 31, 2004, the
bank had issued standby letters of credit in the amount of $346,962 and
$186,354, respectively that served as either bid or performance bonds. The
amount available 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 anticipated credit line will provide adequate
resources for supporting operations during fiscal 2005.
ITEM 3. CONTROLS AND PROCEDURES
A) CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended. Based on this evaluation, our principal executive officer and our
principal accounting officer concluded that our disclosure controls and
procedures were not effective to enable us to record, process, summarize and
report information required to be included in the Company's periodic SEC filings
and annual proxy statement within the required time period.
As previously disclosed in our Form 10-KSB for the Year Ended December 31, 2004
and in our Form 10-QSB for the Three Months Ended March 31, 2005, we are in the
process of correcting the identified weakness by, among other things, allocating
additional personnel to the disclosure process, adopting written disclosure
controls and procedures, forming a disclosure controls committee that will
consider the materiality of information and determine disclosure obligations on
a timely basis and engaging outside counsel to review to future SEC filings.
B) 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 June 30, 2005 that have materially affected,
or are likely to materially effect, our internal control over financial
reporting.
12
PART II - OTHER INFORMATION
ITEM 1. 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 two contracts of approximately
$1,606,000. The GoAP believed that the Company had established a branch office
in India and was 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 had not opened a branch office in
India. The income tax amount that is at issue was approximately $770,000.
The Advance Tax Court of India heard the case in September 2004 and ruled that
Sutron Corporation has a Permanent Establishment in India by virtue of its
Country Manager who maintains an office in New Delhi. The Country Manager has
the authority to sign contracts and perform other duties on behalf of the
Company that fulfills the requirements of Indian tax law and as defined in
Double Taxation Avoidance Agreement with the United States of America.
As a result of this ruling, Sutron Corporation entered into an agreement with
Ernst & Young, New Delhi, India to file tax returns for the tax periods April 1,
2002 to June 30, 2003 and April 1, 2003 to June 30, 2004. The returns for both
tax periods were filed in October 2004. A refund in the amount of approximately
$150,000 will be issued to Sutron for the tax period ending June 30, 2003
resulting from excess withholdings by the Government of Andhra Pradesh in excess
of the tax amount of approximately $5,250. A tax payment of approximately $5,600
was made for the tax period ending June 30, 2004. All taxes paid in India will
be applied as income tax credits on the Company's U.S. tax returns in accordance
with the Double Taxation Avoidance Agreement with the United States of America
and will therefore offset federal taxes.
The Company is currently awaiting acceptance on the two contracts that were
provided to the Government of Andhra Pradesh in 2002. All contractual items on
the systems have been accepted with the exception of four water level monitoring
sites that are located at reservoirs. The Government of Andhra Pradesh believes
that the sites should go down approximately 100 meters at the sites. The Company
does not believe that it is required to provide monitoring at 100 meters due to
lack of specification in the Request for Proposal (RFP) and the Company's
proposal that specified 10 meters at each site. This matter has not yet been but
might possibly be referred to an arbitrator as per provisions of the contract.
In the event that the Company loses the arbitration hearing, additional costs of
approximately $120,000 will be incurred to install the sites down to 100 meters.
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The Company has recognized revenue under these two contracts under the
percentage of completion method and has deferred approximately $13,000 of
revenue based on costs to complete the stilling wells. The Company has not
accrued any additional costs because the Company clearly identified in its price
proposal the level to which the stilling wells would be installed and there was
no specification in the tender. The Company is confident that due to a lack of
specification, the price proposal will take precedence. The Company's price
proposal was incorporated and made a part of the contract and therefore, in the
Company's opinion, reflects the de facto specification in the absence of a
contractual specification.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 1, 2005, an Annual Meeting of Shareholders of Sutron Corporation was
held. Directors elected at the meeting were Raul S. McQuivey, Daniel W. Farrell,
Robert F. Roberts, Jr., Andrew D. Lipman and Thomas R. Porter.
Thompson, Greenspon & Co., P.C. was appointed as independent accountants for
2005. The election of directors and the appointment of the independent
accountants were the only matters voted upon at the meeting. The number of
shares eligible to vote at the meeting was 4,289,551. The results of the voting
on these three matters are shown below.
1. Election of Directors
Name Votes For Votes Withheld
Raul S. McQuivey 3,938,772 680
Daniel W. Farrell 3,938,772 680
Robert F. Roberts, Jr. 3,936,353 3,099
Andrew D. Lipman 3,938,772 680
Thomas R. Porter 3,938,772 680
2. Appointment of Thompson, Greenspon & Co., P.C. as Independent
Accountants.
For Against Abstain
3,928,336 2,400 8,716
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
10.1 Sutron Amended and Restated 1996 Stock Plan
10.2 Sutron Amended and Restated 1997 Stock Plan
10.3 Sutron Amended and Restated 2002 Stock Plan
31.1 Certification of the President and Chief Executive Officer pursuant to
ss.302 of the Sarbanes-Oxley Act of 2002.
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31.2 Certification of the Chief Financial Officer and Treasurer pursuant to
ss.302 of the Sarbanes-Oxley Act of 2002.
32 Certification of the President and Chief Executive Officer and Chief
Financial Officer and Treasurer pursuant to 18 U.S.C. ss.1350, as adopted
pursuant to ss.906 of the Sarbanes-Oxley Act of 2002.
B. REPORTS ON FORM 8-K
The Company filed two Reports on Form 8-K during the second quarter of 2005. A
Form 8-K was filed on May 4, 2005 in regards to the amendment of the Company's
1996, 1997 and 2002 Stock Plans. A Form 8-K was filed on May 13, 2005 in regards
to the Company's 2005 First Quarter earnings news release.
SUTRON CORPORATION
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Sutron Corporation
-----------------------------
(Registrant)
August 15, 2005 /s/ Raul S. McQuivey
--------------- -----------------------------
Date Raul S. McQuivey
President and Chief Executive Officer
(Principal Executive Officer)
August 15, 2005 /s/ Sidney C. Hooper
--------------- -----------------------------
Date Sidney C. Hooper
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
15