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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2007
COMMISSION FILE NUMBER: 0-12227
SUTRON CORPORATION
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(Exact name of registrant as specified in its charter.)
VIRGINIA 54-1006352
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21300 RIDGETOP CIRCLE, STERLING VIRGINIA 20166
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(Address of principal executive offices)
(703) 406-2800
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(Registrants telephone number, including area code)
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) for the Exchange Act. [_]
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. [_]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [_] No [X]
Issuers' revenues for its most recent fiscal year were $18,868,101.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates as of March 27, 2008 was approximately $19,772,000 based on the
closing sale price of such stock.
The number of shares outstanding of the issuers Common Stock, $.01 par value, as
of March 27, 2008 was 4,530,632.
Transitional Small Business Disclosure format (check one): Yes [_] No [X]
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants' definitive proxy statement for the 2008 Annual
Meeting of Shareholders, which will be filed within 120 days after the end of
the year covered by this Form 10-KSB, are incorporated in Part III as set forth
herein.
SUTRON CORPORATION
FORM 10-KSB ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2007
TABLE OF CONTENTS
PART I
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Item 1. Description of Business 4
Item 2. Description of Property 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
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Item 5. Market for Common Equity and Related Stockholder Matters and Small Business Issuer 10
Purchases of Equity Securities
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 7. Financial Statements 20
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 37
Item 8A. Controls and Procedures 37
Item 8A(T). Management's Annual Report on Internal Control Over Financial Reporting 37
Item 8B. Other Information 38
PART III
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Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) 38
of the Exchange Act
Item 10. Executive Compensation 38
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 38
Item 12. Certain Relationships and Related Transactions 38
Item 13. Exhibits 38
Item 14. Principal Accountant Fees and Services 39
3
PART I
THIS FORM 10-KSB INCLUDES FORWARD-LOOKING STATEMENTS REGARDING OUR EXPECTED
FUTURE FINANCIAL POSITION, RESULTS OF OPERATIONS, CASH FLOWS, FINANCING PLANS,
BUSINESS STRATEGY, PRODUCTS AND SERVICES, COMPETITIVE POSITIONS, GROWTH
OPPORTUNITIES, PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS.
STATEMENTS THAT INCLUDE WORDS SUCH AS "ANTICIPATE," "IF," "BELIEVE," "PLAN,"
"ESTIMATE," "EXPECT," "INTEND," MAY," "SHOULD" AND OTHER SIMILAR EXPRESSIONS ARE
FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS INVOLVE RISKS,
UNCERTAINTIES AND CONTINGENCIES WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE, OR
ACHIEVEMENTS TO DIFFER MATERIALLY FROM ANTICIPATED RESULTS, PERFORMANCE, OR
ACHIEVEMENTS. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE IN THE FORWARD-LOOKING STATEMENTS INCLUDE THOSE DISCUSSED UNDER
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND ELSEWHERE IN THIS REPORT. ALL FORWARD-LOOKING STATEMENTS SPEAK
ONLY TO EVENTS AS OF THE DATE ON WHICH THE STATEMENTS ARE MADE. ALL SUBSEQUENT
WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO US OR ANY PERSON
ACTING ON OUR BEHALF ARE QUALIFIED BY THE CAUTIONARY STATEMENTS IN THIS SECTION.
WE UNDERTAKE NO OBLIGATION TO UPDATE OR PUBLICLY RELEASE ANY REVISIONS TO
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS, CIRCUMSTANCES OR CHANGES IN
EXPECTATIONS AFTER THE DATE ON WHICH THE STATEMENT IS MADE.
ITEM 1 - DESCRIPTION OF BUSINESS
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Sutron Corporation was incorporated on December 30, 1975 under the General Laws
of the Commonwealth of Virginia. Our headquarters is located at 21300 Ridgetop
Circle, Sterling, Virginia 20166, and the telephone number at that location is
(703) 406-2800. We maintain a worldwide web address at www.sutron.com. The
information contained on our website is not incorporated by reference into this
Form 10-KSB and shall not be considered a part of this Form 10-KSB.
We design, manufacture and market products and solutions that enable government
and commercial entities to monitor and collect hydrological, meteorological and
oceanic data for the management of critical water resources, for early warning
of potentially disastrous floods, storms or tsunamis and for the optimization of
hydropower plants. We provide real-time solutions and services to our customers
in three areas of the hydrological, meteorological and oceanic markets. First,
we provide real-time data collection and control products consisting primarily
of dataloggers, satellite transmitters/loggers, water level and meteorological
sensors and tides monitoring systems. Second, we provide turnkey integrated
systems for hydrological and meteorological networks including airport weather
systems. Third, we provide services consisting of installation, training and
maintenance of hydrological and meteorological networks and other related
engineering services. Our customers include a diversified base of federal,
state, local and foreign governments, engineering companies, universities and
hydropower companies.
Our ongoing, principal strategic business units consist of the Hydromet Products
Division, the Integrated Systems Division, the Hydrological Services Division
and our India operations that consist of a branch office and a wholly owned
subsidiary, Sutron Hydromet Systems Private Limited. The Integrated Services
Division includes the results of providing airport weather systems and special
projects due to similarity of services and due to these units not being
significant in terms of size and volume. Each unit includes a range of products
and services designed to meet the specific needs of a particular customer
segment. Our India branch office was established in 2004 to comply with India
tax laws and the India wholly owned subsidiary was established in 2005 in order
to gain access to the local market.
PRINCIPAL PRODUCTS AND SERVICES
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HYDROMET PRODUCTS DIVISION
The Hydromet Products Division manufactures dataloggers, satellite
transmitters/loggers, water level and meteorological sensors and tides
monitoring systems. Dataloggers collect sensor data and transmit the data to
central facilities primarily by satellite radio but also by cell phone, fiber
optics or microwave. Our sensors collect hydrological and meteorological data
and include a tipping bucket rain gauge, a barometric pressure sensor, a
temperature sensor and differing types of water level sensors including shaft
encoders, bubbler systems, submersible sensors and radar sensors. Our
dataloggers can interface to sensors from other companies. We have long-standing
relationships with suppliers for wind speed and wind direction, water quality,
humidity and solar radiation sensors. The principal products that are
manufactured by the Hydromet Products Division are described below.
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XPERT AND XLITE DATALOGGERS
The Xpert Datalogger/controller is our fourth generation datalogger. The Xpert
is environmentally hardened and capable of operating from -40 C to 60 C. It runs
on a Microsoft CE operating system, has a 486 microprocessor, C++ programming
and standard 2 MB memory that is expandable to over 1 gigabyte. 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.
The Xpert and XLite dataloggers are the core of a wide-range of remote
monitoring and control systems, The rugged Xpert is highly modular and can be
leveraged to handle multiple applications, from the simplest to the most
complex. Its Sensor Library programs are for widely used brand name sensors and
all Sutron sensors. Generic measurement objects make adding support for new
sensors very easy. It is designed specifically to support a variety of portable
and permanent monitoring and control applications and systems including
automatic weather stations, agrimet stations, synoptic weather stations, AWOS
stations, tide stations, hydromet stations, water level and water quality
stations, rainfall stations, gate control stations, irrigation and water
distribution control stations, stream gaging stations, dam safety stations and
flood forecasting, monitoring, control and warning systems
SATLINK2
In January 2004, the SatLink2 was certified by the National Environmental
Satellite, Data and Information Services (NESDIS). The SatLink2 is a redesign of
the original SatLink transmitter in order to provide the latest features, to
improve functionality and to lower manufacturing costs. The SatLink2 is a high
data rate satellite transmitter/logger that transmits at 100, 300 and 1200 baud,
incorporates GPS and functions as a logger. The SatLink transmitter was
certified by the NESDIS in July 2001 for operation on the Geostationary
Operational Environment Satellite (GOES) system. NESDIS operates two U.S.
Government environmental satellites on this system. All GOES customers are
mandated by NESDIS to purchase high data rate satellite transmitters and to
replace all old 100 baud transmitters within a ten-year period beginning in July
2001. NESDIS made this a requirement in order to increase the amount of data
that the two GOES satellites can handle.
SatLink2 is certified on all major satellite systems around the world and works
with virtually all dataloggers. SatLink2 is programmable from any PC or PDA
using software provided with the unit. SatLink2's innovative design includes
everything needed to collect high quality data, without costly options. Our
standard unit includes a built-in logger, SDI-12 interface, dedicated tipping
bucket input, 4 analog inputs and a powerful mathematical equation editor.
STAGE DISCHARGE RECORDER
The Stage Discharge Recorder is an ultra-reliable SDI-12 optical encoder fused
with logger technology from our Satlink2 Transmitter/Logger to create an encoder
that never forgets. Using proven float-tape-counterweight technology, the Stage
Discharge Recorder is a "plug compatible" replacement for strip chart recorders
or punched-tape recorder. The Stage Discharge Recorder saves data in
ultra-reliable flash memory. This means that there are no backup batteries for
the memory. The Stage Discharge Recorder incorporates standard flume and weir
equations and can compute and log discharge totals and display discharge as well
as flume/weir stage. A built-in event log keeps track of when anyone views or
downloads data or makes changes to the setup. The Stage Discharge Recorder will
run up to one year on an industrial alkaline battery.
ACCUBAR GAUGE PRESSURE SENSOR
The Accubar Gauge Pressure sensor is used in water level monitoring systems and
is a highly accurate solid state pressure transducer capable of measuring
air/dry gas pressures from 0 to 22 psi with a maximum pressure of 35 psi. It is
housed in an aluminum case and with its low power consumption and low
maintenance requirements, it is ideal for remote monitoring applications.
ACCUBUBBLE SELF-CONTAINED BUBBLER SYSTEM
The AccuBubble Self-Contained Bubbler is a mercury-free and nitrogen-free
bubbler apparatus designed for low maintenance water level measuring. Using the
Sutron Accubar Pressure Sensor as the control and sensing element
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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 logger 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. Tide
stations are based on the Xpert data logger and the SatLink2. Xperts run the
powerful Windows CE multi-tasking operating system. Sutron has taken advantage
of Windows CE to equip each tide station with software that meets and exceeds
all of the NOS requirements. In 2004, we enhanced the capabilities of tides
systems by adding Storm Surge/Tsunami software. This software provides added
capability to tides stations to detect and provide tsunami warnings.
The Main Tide Station is designed to detect a vast array of events. Sutron's
Xpert Logger is a Windows device programmable to monitor multiple parameters
including traditional NOS methods such as sudden water level drops and seismic
sensors, or both at one time. It supports a wide variety of water level
monitoring and weather instruments. The Main Tide Station provides
pre-programmed support for all NOS-required tidal data processing. The Main Tide
Station also supports GOES satellite and a wide variety of other telemetry
methods including cell and marine phones. The tides station provides built-in
surge protection for all inputs. Although designed for the tidal market, the
Main Tide Station is an ideal starting point for a wide variety of highly
reliable and accurate weather stations.
INTEGRATED SYSTEMS DIVISION
The Integrated Systems Division provides system integration services consisting
of the design, integration, installation and commissioning of customer-specific
configurations and software applications for hydrological and meteorological
monitoring and control systems. The division is also responsible for the sale of
our XConnect database systems software and long-term software support for
XConnect users. This software capability allows us to provide turnkey
hydrological and meteorological systems to a variety of users. Projects may
range in size from one station to hundreds of stations. Projects usually require
design, equipment integration, software application development, installation,
training and commissioning. Projects can range in duration from several days to
twelve months depending on the scope and complexity of the system.
Airport weather systems are integrated and installed by the Integrated Services
Division. We have contracted with a seasoned manager with over 20 years
experience in the Automatic Weather Observation System (AWOS) market to lead our
airport weather efforts. 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/runway
visibility. Sensors are connected to an Xpert datalogger, which processes the
data, stores it in a relational database and transmits real-time weather
parameters to all designated users, regardless of location. The system produces
weather reports for aviation and meteorological use, virtually automatically and
without need of human intervention.
Special projects are customer funded projects for the development of specific
products or systems. Special projects vary in size, complexity and duration. We
received one Small Business Innovation Research (SBIR) contract in 2007. The
SBIR was to continue to develop and test a prototype (preliminary design and
specifications) for a "DCPI Low Power and Low Cost Command Receiver". The new
DCPI (Data Collection Platform with Interrogate Capability) employing DS-CDMA RF
transmission techniques will allow two-way communication through the GOES
Satellite System and other geostationary satellite systems.
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HYDROLOGICAL SERVICES DIVISION
The Hydrological Services Division provides hydrologic services including data
interpretation and analysis, flow modeling (low flow, rainfall runoff, unsteady
flow routing, water surface profiles), field studies (time of travel, diffusion,
dispersion, calibration of flow control structures, site location), hydrologic
studies (water budget, regression analysis, basin inventory studies),
environmental permitting, legal or expert witness and equipment integration,
installation, commissioning and maintenance.
SUTRON INDIA OPERATIONS
The Sutron India Operations consist of a Branch Office that was established
early in 2004 in order to comply with India tax law and to perform work on an
annual maintenance contract that was received from the Central Water Commission
of India (CWC) in July 2004. In February 2005, we established Sutron HydroMet
Systems Private Limited, a wholly owned subsidiary, in order to bid on National
tenders. The Sutron India Operations procures local goods for projects and
performs systems integration, civil works construction, installation,
commissioning and maintenance. The Sutron India Operations maintains over 260
remote automatic real-time hydromet monitoring stations in India under contracts
with the CWC and with the Government of Andhra Pradesh.
SALES AND MARKETING
-------------------
We market our products and services domestically and internationally. Domestic
sales are conducted by our internal sales staff that consists of five salaried
sales personnel who are directly engaged in direct sales activities. The sales
staff is assisted by two other employees in marketing and sales support
functions. Internationally, we have two employees who cover the world and who
work closely with our international sales network that consists of 35 resellers
and agents in Canada, Latin and South America, Europe, Africa, Asia and
Australia.
COMPETITION
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We compete in the hydrological, meteorological and oceanic monitoring markets
and are aware of both domestic and foreign competitors who offer products,
systems, and services of their own as well as companies that are systems
integrators who primarily offer real-time networks from components manufactured
by others. We are aware of numerous firms, ranging in size, that offer
competitive dataloggers, high data rate satellite transmitters, sensors and
other instruments and software.
Several of these companies have financial, research and development, marketing,
management and technical resources substantially greater than ours. We may also
be at a competitive disadvantage because we purchase certain sensors and other
equipment components, as well as computer hardware and peripheral equipment,
from manufacturers who are or may become competitors with respect to one or more
of our products.
With respect to our professional engineering and technical services, we are in
competition with numerous diverse engineering and consulting firms, many of
which have larger staffs and facilities, and are better known, have greater
financial resources, and have more experience. As to hydrological services, we
are aware that many firms offer maintenance services; some of these companies
have larger staffs, are better equipped, and have greater financial, marketing
and management resources. Price, features, product quality, promptness of
delivery, customer service and performance are believed to be the primary
competitive factors with respect to all of our products and services.
CUSTOMERS
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During 2007, approximately 33% of our products and services were sold to the
Federal Government. Net sales and revenues in 2007 among the various agencies
were as follows: Department of the Interior, 21%; Department of Commerce, 7% and
Department of Defense, 5%. The revenues from the Department of the Interior were
among the U.S. Geological Survey and the Bureau of Reclamation. The revenue from
the Department of Defense was primarily from the U.S. Army Corps of Engineers.
The revenue with the Department of Commerce were from sales of tides systems and
spares to NOS and SatLink2 Transmitters to the National Data Buoy Center. The
loss of any significant portion of our sales to any major customer, the loss of
a single major customer or budgetary constraints of any one of our major
customers could have a material adverse effect on our business and financial
results.
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We also performed on various contracts of foreign origin. Revenues from foreign
customers amounted to approximately 40% of revenues in 2007, 36% of revenues in
2006 and 25% of revenues in 2005.
RESEARCH AND DEVELOPMENT
------------------------
During the three years ended December 31, 2007, 2006, and 2005, we incurred
expenses of $1,293,207, $1,358,624, and $1,321,591 respectively, on activities
relating to the development of new products and enhancements and improvements of
existing products.
In 2007, we focused on enhancements to the next generation Xpert and XLite
Dataloggers that were redesigned in 2006 and released to production in 2007. We
also focused on the development of a radar water level sensor; a precision water
level measuring instrument using radar pulses that allow measurements to be made
without direct contact with the water surface. A radar water level sensor can be
located on a bridge, pier or any structure over the water's surface. We
anticipate that there will be significant growth in sales of radar water level
sensors due to the sensor's non-contact with the water surface. We also
developed a continuous flow bubbler system which operates in severe cold
conditions. This sensor is critical for customers located in climates that have
severe winter conditions.
We also performed work on a Small Business Innovation Research (SBIR) contract
in the amount of $400 thousand that was received in 2007. The SBIR was to
continue to develop and test a prototype (preliminary design and specifications)
for a "DCPI Low Power and Low Cost Command Receiver". The new DCPI (Data
Collection Platform with Interrogate Capability) employing DS-CDMA RF
transmission techniques will allow two-way communication through the GOES
Satellite System and other geostationary satellite systems.
PATENTS, TRADEMARKS, COPYRIGHTS AND AGREEMENTS
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Although we do not deem patent protection to be of significant importance to our
industry, we may in the future seek patents for certain products, real-time
networks, and technology as well as software products, real-time networks, and
technology. Our software products and innovations may not be patentable but may
be subject to automatic but limited copyright protection. We treat our products,
real-time networks, technology and software as proprietary and rely on trade
secret laws and internal non-disclosure safeguards rather than making our
designs and processes generally available to the public by applying for patents.
Further, we believe that, because of the rapid pace of technological change in
the computer, electronics and telecommunications industries, patent and
copyright protection is of less significance than factors such as the knowledge
and experience of our personnel and their ability to design and develop enhanced
and new products, real-time networks and their components.
MANUFACTURING
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Our manufacturing operations consist of materials planning and procurement,
final assembly, product assurance testing, quality control, and packaging and
shipping. We currently use several independent manufacturers to provide certain
printed circuit boards, chassis and subassemblies. We believe that the
efficiency of our manufacturing process to date is largely due to our product
architecture and our commitment to manufacturing process design. We have spent
significant engineering resources producing customized software to assure
consistent high product quality. Products are tested after the assembly process
using internally developed automated product assurance testing procedures.
Our products use certain components, such as microprocessors, memory chips and
pre-formed enclosures that are acquired or available from one or a limited
number of sources. We have generally been able to procure adequate supplies of
these components in a timely manner from existing sources. While most components
are standard items, certain application-specific integrated circuit chips used
in many of our products are customized to our specifications. None of the
suppliers of components operate under contract. Additionally, availability of
some standard components may be affected by market shortages and allocations.
Our inability to obtain a sufficient quantity of components when required or to
develop alternative sources at acceptable prices and within a reasonable time
could result in delays or reductions in product shipments which could materially
affect our operating results in
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any given period. In addition, as referenced above, we rely heavily on
outsourcing subcontractors for production. The inability of such subcontractors
to deliver products in a timely fashion or in accordance with our quality
standards could materially affect our operating results and business.
We received an ISO 9001 certification on March 12, 1999 and an ISO 9001:2000
certification on August 13, 2003. We continued to be certified during fiscal
year 2007.
GOVERNMENT REGULATION
---------------------
We manufacture some of our products and provide some of our services under
contracts with the United States government. We manufacture other products under
contracts with private third parties who utilize our products to satisfy United
States government contracts to which they are a party. Federal acquisition
regulations and other federal regulations govern these relationships. Some of
these regulations relate specifically to the seller-purchaser relationship with
the government (which may exist on our own account, or that of one or more of
our clients), such as the bidding and pricing rules. Under regulations of this
type, we must observe pricing restrictions, produce and maintain detailed
accounting data, and meet various other requirements.
Other regulations relate to the conduct of our business generally, such as
regulations and standards established by the Occupational Safety and Health Act
or similar state laws and relating to employee health and safety. In particular,
regulations governing these contracts require that we comply with federal laws
and regulations, in general, or face civil liability, cancellation or suspension
of existing contracts, or ineligibility for future contracts or subcontracts
funded in whole or in part with federal funds. In addition, loss of governmental
certification (affirming that we are eligible to participate on government
contracted work) could cause some of our customers to reduce or cease making
purchases from us, which would adversely impact our business.
FOREIGN OPERATIONS
------------------
We opened a branch office in New Delhi, India in December 2004. The branch
office was established in order to comply with India tax law after the Advance
Tax Court of India determined that we had a Permanent Establishment in India as
a result of the employment of a full-time Country Manager. The branch office can
perform sales and marketing and installation and maintenance activities but is
restricted from bidding on domestic Indian tenders. We began the process of
forming a wholly owned subsidiary in India in 2004 in order to bid on domestic
India tenders. Formal approval of the wholly owned subsidiary was given in
February 2005. Our India Operations procures local goods for projects and
performs systems integration, civil works construction, installation,
commissioning and maintenance services including maintaining over 260 remote
automatic real-time hydromet monitoring stations under contracts with the CWC
and with the Government of Andhra Pradesh.
EMPLOYEES
---------
As of December 31, 2007, we and our wholly owned subsidiary had a total of 95
employees, of which 94 were full time. We also from time to time employ
part-time employees and hires independent contractors. Our employees are not
represented by any collective bargaining agreement and we have never experienced
a work stoppage. We believe that our employee relations are good.
BACKLOG
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At December 31, 2007, our backlog was $11,099,501 as compared with $7,269,144 at
December 31, 2006. We anticipate that 66% of our 2007 year-end backlog will be
shipped in 2008. An economic downturn may result in increased cancellation of
orders, which could have a material adverse effect on our ability to convert our
backlog into revenues.
ITEM 2 - PROPERTIES
-------------------
Our corporate headquarters are located at 21300 Ridgetop Circle, Sterling,
Virginia. We lease this 17,000 square foot facility and it contains our
administrative offices, sales and marketing offices and manufacturing
facilities. The lease expires in March 2009. We lease an additional 7,000 square
feet of space in Sterling, Virginia for our
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Research and Development group and Integrated Services Division. The lease for
this facility expires in March 2009 as well.
We lease 5300 square feet of office and warehouse space in West Palm Beach,
Florida. The four-year lease expires in August 2008. The Hydrological Services
division uses this space which consists of both office and warehouse space. The
Hydrological Services Division also occupies 1500 square feet of leased office
space in Brandon, Florida. The lease expires in December 2008. This space is
used for sales and marketing and engineering offices. The Corporation entered
into lease agreements for office space and furniture in New Delhi, India in
September 2006. The three-year leases expire in August 2009. The India branch
office and wholly owned subsidiary use this space for offices. We believe that
our facilities are adequate for our present needs and that our properties are in
good condition, well maintained and adequately insured.
ITEM 3 - LEGAL PROCEEDINGS
--------------------------
Various legal claims can arise from time to time in the normal course of
business which, in the opinion of management, will have no material effect on
our financial statements. We have been named in a compensation claim under the
Indian Anti-Trust Law that is pending before The Monopolies and Restrictive
Trade Practices Commission in New Delhi, India. Management believes that the
case is unsubstantiated and intends to vigorously defend itself.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
No matter was submitted to a vote of security holders in the fourth quarter of
2007.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
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SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
----------------------------------------------------
MARKET INFORMATION
Our common stock trades on the Nasdaq Capital Market (formerly the Nasdaq
SmallCap Market) under the symbol "STRN". The table below sets forth the high
and low sales for the periods shown.
FISCAL YEAR ENDED DECEMBER 31, 2006 HIGH LOW
----------------------------------------- ------------ ------------
First Quarter $ 9.70 $ 7.00
Second Quarter $ 8.79 $ 7.34
Third Quarter $ 8.66 $ 7.22
Fourth Quarter $ 8.60 $ 6.67
FISCAL YEAR ENDED DECEMBER 31, 2007
----------------------------------------- ------------ ------------
First Quarter $ 9.85 $ 6.28
Second Quarter $ 10.51 $ 6.20
Third Quarter $ 9.60 $ 8.05
Fourth Quarter $ 12.94 $ 8.14
The closing price of the Common Stock on March 27, 2008 was $6.84, and on that
date, there were approximately 900 stockholders of record.
DIVIDENDS
We have never declared or paid a dividend on our common stock. We intend to
retain future earnings to fund development and growth of our business.
10
RECENT SALES OF UNREGISTERED SECURITIES
There were no issuances of unregistered securities in fiscal 2007 that have not
been reported previously in a quarterly report on Form 10-QSB or a current
report on Form 8-K.
ISSUER PURCHASES OF EQUITY SECURITIES
No purchases of Sutron equity securities were made by or on behalf of Sutron in
the fourth quarter of our fiscal year ended December 31, 2007.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes the securities authorized for issuance under
equity compensation plans as of December 31, 2007:
NUMBER OF WEIGHTED
SECURITIES TO BE AVERAGE
ISSUED UPON EXERCISE PRICE NUMBER OF
EXERCISE OF OF OUTSTANDING SECURITIES
OUTSTANDING OPTIONS, REMAINING
OPTIONS, WARRANTS WARRANTS AND AVAILABLE FOR
AND RIGHTS RIGHTS FUTURE ISSUANCE
--------------------------------------------------
Equity compensation plans
approved by stockholders -- -- --
Equity compensation plans
not approved by stockholders 583,252 $ 1.65 150,667
--------------------------------------------------
Total 583,252 $ 1.65 150,667
==================================================
11
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.
BACKGROUND AND OVERVIEW
Our primary focus is to provide real-time systems solutions, including equipment
and software, and services to our customers in the areas of hydrological
monitoring and control, meteorological monitoring including airport weather
systems, oceanic monitoring and hydrological services. We design, manufacture
and market these products and services to a diversified customer base consisting
of federal, state, local and foreign governments, engineering companies,
universities and hydropower companies. Our products and services enable these
entities to monitor and collect hydrological, meteorological and oceanic data
for the management of critical water resources, for early warning of potentially
disastrous floods, storms or tsunamis, for the optimization of hydropower plants
and for providing real-time weather conditions at airports.
Our key products are the SatLink2 Transmitter/Logger, the Xpert/XLite
dataloggers, the Accububble Self-Contained Bubbler, the Accubar Pressure Sensor
and XConnect Systems Software. These are the essential components of most
systems and are provided to customers as off-the-shelf equipment or as part of a
custom system. The SatLink2 is a key product because it functions both as a
transmitter and logger. It is an excellent solution for small systems that do
not require a significant number of sensors or communications options. The Xpert
and XLite are more powerful dataloggers that have significant more logging
capability and communications options than the SatLink2.
We expanded our services capabilities when we started our Hydrological Services
Division in 2001. The principal customer of this division has been the South
Florida Water Management District (SFWMD) which is a regional agency of the
state of Florida that is charged with managing and protecting water resources in
a 16 county area. We provide a variety of services to SFWMD as well as other
entities including hydrologic modeling, flood and stormwater management, river
and stream analysis, and equipment integration, installation, commissioning and
maintenance.
We are beginning fiscal year 2008 with a backlog of $11,099,501 as compared to
beginning fiscal year 2007 with a backlog of $7,269,144. In 2008, we anticipate
that we will continue to experience significant quarterly fluctuations in our
sales and revenues. Operating results will depend upon the product mix and upon
the timing of project awards. International sales, which totaled 40% of revenues
for 2007, continue to constitute a more significant portion of our revenues. We
are aware of many significant international opportunities and we expect
international revenues to grow as a percentage of our total business.
International sales are however difficult to forecast and international awards
are frequently delayed due to governmental approvals. We are committed to
expanding our airport weather systems although we are relatively new in this
market and compete against established firms with more experience. We are also
committed to growing our hydrological services however our primary customer in
Florida has expanded the pool of qualified contractors on all major contracts.
We therefore might receive lower contracts amounts in 2008 due to the expanded
list of qualified contractors. We are committed in our ongoing sales, marketing
and research and development activities to sustain and grow our sales and
revenues from our products and services. We expect our sales and marketing,
research and development and general and administrative expenses to increase
moderately in 2008 as compared to 2007.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of financial condition and results of operations is
based upon the consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and
12
liabilities. We evaluate, on an on-going basis, our estimates and judgments,
including those related to bad debts, excess and obsolete inventories, warranty
obligations, income taxes, contingencies and litigation. Our estimates are based
on historical experience and assumptions that we believe to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
We believe the following critical accounting policies, among others, affect our
more significant judgments and estimates used in the preparation of the
consolidated financial statements.
o Revenue recognition;
o Allowance for doubtful accounts;
o Allowances for excess and obsolete inventories;
o Accounting for warranty obligations;
o Accounting for income taxes;
o Accounting and valuation of stock option compensation.
REVENUE RECOGNITION - Our revenue recognition policy is consistent with the
requirements of Staff Accounting Bulletin No. 101 (SAB 101), "Revenue
Recognition in Financial Statements," Statement of Position No. 97-2 (SOP 97-2),
"Software Revenue Recognition," and other applicable revenue recognition
guidance and interpretations. In general, we record revenue when it is realized,
or realizable, and earned. We consider these requirements met when persuasive
evidence of an arrangement exists, the products or services have been provided
to the customer, the sales price is fixed or determinable and collectibility is
reasonably assured. Our revenue reflects reductions attributable to discounts
and customer returns.
For our products, consisting of both equipment and software, revenue is
recognized upon shipment, delivery, installation or customer acceptance of the
product, as agreed in the customer order or contract. We do sell our software
products without the related equipment although software products are integral
to systems. Our typical system requires no significant production, modification
or customization of the software or hardware. For complex systems, revenue is
deferred until customer acceptance. We do provide customer discounts and do
allow for product returns. We do not do consignment sales or bill and hold.
Revenue reflects reductions due to discounts and product returns. Product
returns have historically been insignificant in amount.
Our sales arrangements for systems often include services in addition to
equipment and software. These services could include equipment integration,
software customization, installation, maintenance, training, and customer
support. For sales arrangements that include bundled hardware, software and
services, we account for any undelivered service offering as a separate element
of a multiple-element arrangement. Amounts allocated to each element are based
on its objectively determined fair value, such as the sales price for the
product or service when it is sold separately. Revenue for these services is
typically recognized ratably over the period benefited or when the services are
complete.
We use the percentage of completion method for recognizing revenue and profits
when we perform on fixed price contracts that extend over a number of years.
Under the percentage of completion method, revenue and profits are recorded as
costs are incurred based on estimates of total sales value and costs at
completion where total profit can be estimated with reasonable accuracy and
ultimate realization is reasonably assured. Profit estimates are revised
periodically based upon changes and facts, and any losses on contracts are
recognized immediately. Contracts may contain provisions to earn incentive and
award fees if targets are achieved. Incentive and award fees that can be
reasonably estimated are recorded over the performance period of the contract.
Incentive and award fees that cannot be reasonably estimated are recorded when
awarded. We recognize revenue from time-and-materials contracts to the extent of
billable rates, times hours delivered, plus direct materials costs incurred.
Some of the contracts include provisions to withhold a portion of the contract
value as retainage. Our policy is to take into revenue the full value of the
contract, including any retainage, as we perform against the contract.
13
ALLOWANCE FOR DOUBTFUL ACCOUNTS - Accounts receivable arise from the normal
course of selling products on credit to customers. An allowance for doubtful
accounts has been provided for estimated uncollectable accounts. Accounts
receivable balances, historical bad debts, customer concentrations, customer
creditworthiness, current economic trends and changes in customer payment terms
and practices are analyzed when evaluating the adequacy of the allowance for
doubtful accounts. Individual accounts are charged against the allowance when
collection efforts have been exhausted.
INVENTORY VALUATION - Our inventories are stated at the lower of cost or market.
We provide allowances on inventories for any material that has become obsolete
or may become unsaleable based on estimates of future demand and sale price in
the market. Judgments with respect to saleability and usage of inventories,
estimated market value, and recoverability upon sale are complex and subjective.
Such assumptions are reviewed periodically and adjustments are made, as
necessary, to reflect changed conditions.
WARRANTY OBLIGATIONS - We warranty our products for up to two years and
estimated warranty costs are based upon management's best estimate of the
amounts necessary to settle future and existing claims on equipment sold as of
the balance sheet date. Factors considered include actual past experience of
product returns and the related estimated cost of labor and material to make the
necessary repairs as well as technological advances and enhanced design and
manufacturing processes. If actual future product return rates or the actual
costs of material and labor differ from the estimates, adjustments to the
accrued warranty liability are made.
INCOME TAXES - We are taxed as a domestic U.S. corporation under the Internal
Revenue Code. Deferred income tax assets and liabilities are recognized for the
expected future tax consequences of events that have been included in the
consolidated financial statements or tax returns. Deferred income tax assets and
liabilities are determined based on the differences between the financial
statement and tax basis of assets and liabilities using currently enacted tax
rates in effect for the years in which the differences are expected to reverse.
Deferred tax assets are evaluated and a valuation allowance is established if it
is more likely than not that all or a portion of the tax asset will not be
utilized.
STOCK OPTION COMPENSATION - We adopted the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), SHARED-BASED PAYMENT, (SFAS
123(R)), on January 1, 2006, which requires the measurement and recognition of
compensation expense for all share-based payment awards to employees and
directors based on estimated fair values. Additionally, the Corporation follows
the Securities and Exchange Commission's Staff Accounting Bulletin No. 107,
SHARE-BASED PAYMENT (SAB 107), issued in March 2005, which provides supplemental
SFAS 123(R) application guidance based on the views of the SEC.
The Corporation adopted SFAS 123(R) using the modified prospective transition
method. Under this transition method, share-based compensation expense
recognized during the year ended December 31, 2006 included: (a) compensation
expense for all share-based awards granted prior to, but not yet vested, as of
January 1, 2006, based on the grant date fair value estimated in accordance with
the original provisions of SFAS 123, and (b) compensation expense for all
share-based awards granted beginning January 1, 2006, based on the grant date
fair value estimated in accordance with the provisions of SFAS 123(R). In
accordance with the modified prospective transition method, the Corporation's
consolidated financial statements for prior periods have not been restated to
reflect the impact of SFAS 123(R).
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, certain income
statement data of the Company expressed as a percentage of revenues:
Year Ended December 31,
--------------------------------
2007 2006 2005
-------- -------- --------
Net sales and revenues 100.0% 100.0% 100.0%
Cost of sales and revenues 59.5 62.1 58.3
-------- -------- --------
Gross profit 40.5 37.9 41.7
Selling, general and administrative expenses 17.6 15.1 18.9
Research and Development expenses 6.8 7.1 8.5
-------- -------- --------
Operating income 16.1 15.7 14.3
-------- -------- --------
Interest income (expense) .6 .4 .1
-------- -------- --------
Income before income taxes 16.7 16.1 14.4
Income taxes (benefit) 5.8 3.5 4.9
-------- -------- --------
Net income 10.9% 12.6% 9.5%
======== ======== ========
14
FISCAL 2007 COMPARED TO FISCAL 2006
NET SALES AND REVENUES
Net sales and revenues for 2007 decreased 3% to $18.9 million from $19.4 million
in 2006. The decrease was primarily due to decreased domestic project revenues.
Revenues are reported internally by principal operating division or profit
center consisting of the Hydromet Products Division, the Integrated Services
Division, which includes airport weather systems and special projects that are
funded R&D activities, the Hydrological Services Division and Sutron's India
Operations. The Hydromet Products Division, which is responsible for sales of
standard products, experienced a revenue increase of 9% to $10 million from $9.2
million in 2006. Integrated Systems revenue increased 2% to $6.3 million from
$6.2 million in 2006. Revenues from the Hydrological Services Division decreased
to $2.0 million from $2.2 million in 2006. Sutron's India Operations had
decreased revenues of $572 thousand as compared to $1.8 million in 2006 due
primarily to significant costs on a contract with the Central Water Commission
to deliver, install, provide training and commission 168 rainfall monitoring
stations being incurred in 2006 and therefore higher revenues being recognized
in 2006 as compared to 2007.
Domestic net sales and revenues for 2007 decreased 10% to $11.3 million from
$12.5 million in 2006. Net sales and revenues from standard products increased
to $7.7 million in 2007 from $7.0 million in 2006 due primarily to increased
sales of the SatLink 2 Transmitter/Logger. Net sales and revenues from
Integrated Systems decreased to $1.6 million compared to $3.3 million in 2006,
primarily due to decreased project activity. In 2006, the Company performed on
various contracts totaling approximately $2.0 million with the Army Corps of
Engineers in New Orleans to replace equipment that was destroyed by Hurricane
Katrina. Net sales and revenues from Hydrological Services decreased to $2.0
million from $2.2 million in 2006 due to decreased project activity.
International net sales and revenues increased 9% to $7.5 million in 2007 from
$6.9 million in 2006. Net sales and revenues from standard products increased to
$2.3 million from $2.2 million in 2006. Net sales and revenues from Integrated
Systems increased to $4.7 million from $2.9 million due primarily to revenues of
$2.2 million from an order from Washington Group International to provide water
level, snow, rainfall and water quality monitoring equipment to the Iraq
Ministry of Water Resources. Sutron India Operations had net sales and revenues
of $572 thousand as compared to $1.8 million in 2006 due to decreased project
activity as the Central Water Commission project to provide 168 rainfall
monitoring stations was near completion and acceptance at the end of 2007.
The Department of the Interior, the principal agencies being the US Geological
Survey and the Bureau of Reclamation, was our largest customer accounting for
21% and 17% of total revenues in years 2007 and 2006, respectively. Non-federal
government, commercial and international revenues represented 67% of revenues in
2007 and 59% in 2006.
COST OF SALES AND REVENUES
Cost of sales as a percentage of revenues decreased to 59.5% for 2007 compared
to 62.1% for 2006. The decrease reflects changes in product mix. In 2007, our
Hydromet Products Division had increased standard product revenues which enabled
us to be more efficient and to recover fixed costs. Our Integrated Systems
Division also helped to reduce cost of sales as they benefited from the
Washington International Group order which consisted primarily of standard
products. Standard products carry substantially higher margins than projects. In
2006, we had substantial project work with the Army Corps of Engineers in New
Orleans that was labor intensive resulting in higher cost of sales. Our
Hydrological Services Division experienced a revenue decrease that resulted in
higher cost absorption and had one contract that was underbid by the former vice
president of the division that resulted in substantial losses.
15
Cost of sales for both 2007 and 2006 include provisions for inventory
obsolescence, physical inventory adjustments and inventory valuation
adjustments. We continually pursue product cost reductions through continual
review of procurement sourcing based on quality and cost goals, product value
engineering and improvements in manufacturing processes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $3.3 million in 2007 as
compared to $2.9 million in 2006. Selling, general and administrative expenses
as a percentage of revenues increased to 17.6% in 2007 from 15.1% in 2006. The
increased expenses were primarily due to the addition of two domestic salesmen
in 2007, higher legal costs relating to a lawsuit against a former employee to
recover monetary damages, SOX 404 compliance costs and higher standby letter of
credit fees relating to performance bonds for various international projects.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased to $1.29 million in 2007 from $1.36
million in 2006. Research and development expenses as a percentage of revenues
decreased to 6.8% in 2007 from 7.1% in 2006. In 2007, product development
focused on two water level sensors. The first was a radar water level sensor
which is a precision water level measuring instrument that uses radar pulses
without direct contact with the water surface. The second was a continuous flow
bubbler system which operates in severe cold conditions. We also continued to
focus on enhancements to the Xpert and XLite dataloggers that were upgraded in
2006 and released in 2007.
INTEREST INCOME AND EXPENSE, NET
We earned net interest income of $121,448 in 2007 as compared with net interest
income of $68,394 in 2006. Higher cash and cash equivalent balances were
responsible for the increase in net interest income.
INCOME TAXES
Income tax expense for 2007 was $1,098,000 compared to $674,000 for 2006. The
provision for income taxes for 2007 represents an effective tax rate of
approximately 34% compared with 22% for 2006. In 2006, tax deductible
compensation expense from the exercise of non-qualified stock options reduced
income taxes by approximately $440,000 as compared to a reduction of $56,000 in
2007.
FISCAL 2006 COMPARED TO FISCAL 2005
NET SALES AND REVENUES
Net sales and revenues for 2006 increased 26% to $19.4 million from $15.4
million in 2005. The increase was primarily due to two contracts in India and
contracts with the U.S. Army Corps of Engineers in New Orleans to replace
equipment that was destroyed by Hurricane Katrina. Revenues are reported
internally by principal operating division or profit center consisting of the
Hydromet Products Division, the Integrated Services Division, which includes
special projects that are funded R&D activities and airport weather systems, the
Hydrological Services Division and Sutron's India Operations. The Hydromet
Products Division, which is responsible for sales of standard products,
experienced a revenue decline of 1% to $9.2 million from $9.3 million in 2005.
Integrated Systems revenue increased 88% to $6.2 million from $3.3 million in
2005, due primarily to the aforementioned contracts in India and with the U.S.
Army Corps of Engineers in New Orleans. Revenues from the Hydrological Services
Division decreased to $2.2 million from $2.6 million in 2005. The Vice President
of this division resigned during 2006. The division now operates under two
managers, one located in our West Palm Beach office and the other in our Brandon
office. Sutron's India Operations had increased revenues of $1.8 million as
compared to $.2 million in 2005 due primarily to work completed on a contract
with the Central Water Commission to deliver, install, provide training and
commission 168 rainfall monitoring stations.
16
Domestic net sales and revenues for 2006 increased 8% to $12.5 million from
$11.6 million in 2005. Net sales and revenues from standard products decreased
to $7 million in 2006 from $7.5 million in 2005. A decrease in sales of NOS
tides systems to approximately $1.2 million in 2006 from approximately $2.4
million in 2005 was the result of one-time funding increases in tides monitoring
systems by NOS after the tsunami in Indonesia. This decrease was partially
offset by increased sales of SatLink2 transmitters/loggers. Net sales and
revenues from Integrated Systems increased to $3.3 million compared to $1.5
million in 2005, primarily due to increased project activity relating to
contracts with the Army Corps of Engineers. Net sales and revenues from
hydrological services decreased to $2.2 million from $2.6 million in 2005 due to
the reorganization of our operations in Florida.
International net sales and revenues increased 79% to $6.9 million in 2006 from
$3.8 million in 2005. Net sales and revenues from standard products increased to
$2.2 million from $1.8 million in 2005 due to increased contract revenue from
the supply of standard products on the Central Water Commission of India
contract. Net sales and revenues from Integrated Systems increased to $2.9
million from $1.8 million due primarily to increased revenues from a contract
with the India Meteorological Department to provide 100 automatic weather
stations. Sutron India Operations had net sales and revenues of $1.8 million as
compared to $.2 million in 2005. Approximately $1.6 million of the increase was
related to revenues from the Central Water Commission of India contract. We
anticipate that this contract will be completed by mid-2007.
The Department of the Interior, the principal agencies being the US Geological
Survey and the Bureau of Reclamation, was our largest customer accounting for
17% and 22% of total revenues in years 2006 and 2005, respectively. Non-federal
government, commercial and international revenues represented 58% of revenues in
2006 and 56% in 2005.
COST OF SALES AND REVENUES
Cost of sales as a percentage of revenues was 62.1% for 2006 compared to 58.3%
for 2005. The increase reflects changes in product mix. In 2005, we had
significant sales of NOS tide systems that contributed to reduced cost of sales
as we purchased materials in greater quantities and experienced labor
efficiencies with larger production runs. In 2006, our standard product sales
decreased slightly and we had increased project costs. Projects have higher
costs than standard products due to higher labor content and the use of
non-Sutron parts. The projects in New Orleans were more labor intensive than
expected and resulted in higher costs. Our Hydrological Services Division
experienced a revenue decrease that resulted in higher cost absorption and had
difficulties on several projects that resulted in cost overruns. Since the
resignation of the Vice President of the Hydrological Services Division, we have
made adjustments to reduce personnel and associated costs.
Cost of sales for both 2006 and 2005 include provisions for inventory
obsolescence, physical inventory adjustments and inventory valuation
adjustments. We continually pursue product cost reductions through continual
review of procurement sourcing based on quality and cost goals, product value
engineering and improvements in manufacturing processes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $2.9 million in 2006 and 2005.
Selling, general and administrative expenses as a percentage of revenues
decreased to 15.1% in 2006 from 18.9% in 2005.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased slightly to $1.36 million in 2006
from $1.32 million in 2005. Research and development expenses as a percentage of
revenues decreased to 7.1% in 2006 from 8.5% in 2005. In 2006, product
development focused on enhancements to the Xpert and XLite Dataloggers that will
provide significant additional communication capabilities as well as improved
functionality. We also focused on the development of a radar water level sensor
which is a precision water level measuring instrument that uses radar pulses
without direct contact with the water surface. Another significant product
development was on the addition of enhanced functionality to our stage discharge
recorder that is used to measure water discharge in irrigation ditches.
17
INTEREST INCOME AND EXPENSE, NET
We earned net interest income of $68,394 in 2006 as compared with net interest
income of $22,708 in 2005. Higher cash and cash equivalent balances and higher
interest rates were responsible for the increase in net interest income.
INCOME TAXES
Income tax expense for 2006 was $674,000 compared to $755,000 for 2005. The
provision for income taxes for 2006 represents an effective tax rate of
approximately 22% compared with 34% for 2005. This significant decrease is
primarily due to tax deductible compensation expense from the exercise of
non-qualified stock options that reduced income taxes by approximately $440,000.
OFF-BALANCE SHEET ARRANGEMENTS
The Company is not a party to any off-balance sheet transactions, arrangements
or obligations that have, or are reasonably likely to have, a material effect on
the Company's financial condition, changes in the financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital
resources.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents was $5,299,904 at December 31, 2007 compared to
$1,539,032 at December 31, 2006. Working capital increased to $11.6 million at
December 31, 2007 compared with $9.5 million at December 31, 2006. The increase
resulted from the earnings in 2007.
Net cash provided by operating activities was $3,983,274 for the year ended
December 31, 2007, compared to net cash used by operating activities was
$430,148 for the year ended December 31, 2006, and net cash provided by
operating activities of $840,634 for the year ended December 31, 2005. The
increase in net cash provided was due to a significant decrease in accounts
receivable in 2007 as compared to an accounts receivable increase in 2006.
Net cash used by investing activities was $204,456 for the year ended December
31, 2007, compared to cash used by investing activities of $45,885 for the year
ended December 31, 2006 and compared to cash provided by investing activities of
$47,034 for the year ended December 31, 2005. The decrease in 2007 resulted
primarily from the purchases of property and equipment. The decrease in 2006
resulted primarily from the purchases of property and equipment that was
partially offset by a reduction in restricted cash. A decrease in restricted
cash in 2005 exceeded the purchases of property and equipment.
Net cash provided by financing activities was $37,306 for the year ended
December 31, 2007 due to the proceeds from the exercise of employee stock
options. Net cash provided by financing activities was $164,934 for the year
ended December 31, 2006 due to the proceeds from the exercise of employee stock
options. Net cash used by financing activities was $53,370 for the year ended
December 31, 2005 due primarily to payments on term notes.
We have a revolving credit facility of $3,000,000 with Branch Banking and Trust
(BB&T). We are permitted to borrow based on accounts receivable and inventory
according to pre-established criteria. The credit facility expires on August 5,
2008 and is secured by substantially all assets of the Company. Borrowings bear
interest at the bank's prime rate. During 2007, there was one borrowing on the
line of credit. We frequently bid on and enter into international contracts that
require bid and performance bonds. At December 31, 2007 and 2006, BB&T had
issued standby letters of credit in the amount of $1,652,818 and $532,300 that
served as either bid or performance bonds. The amount available to borrow under
the line of credit was reduced by these amounts.
Management believes that its existing cash resources, cash flow from operations
and short-term borrowings on the existing credit line will provide adequate
resources for supporting operations during fiscal 2008. Although there can be no
assurance that our revolving credit facility will be renewed, management
believes that, if needed, it would be able to find alternative sources of funds
on commercially acceptable terms.
18
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
SFAS 159. In February 2007, the Financial Account Standards Board (FASB) issued
SFAS No. 159, THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL
LIABILITIES. SFAS 159 permits entities to choose to measure many financial
instruments, and certain other items, at fair value. SFAS 159 applies to
reporting periods beginning after November 15, 2007. The adoption of SFAS 159 is
not expected to have a material impact on the Corporation's financial condition
or results of operations.
SFAS 157. In September 2006 the FASB issued its SFAS No. 157, FAIR VALUE
MEASUREMENTS (SFAS 157). This Statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. SFAS 157 applies
under other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS 157 does not require any new fair value measurements. However,
for some entities, the application of this Statement will change current
practice. SFAS 157 is effective for fiscal years beginning after November 15,
2007. The Corporation does not expect that adoption of this standard will have a
material impact on its financial position, operations or cash flows.
SAB 108. In September 2006, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 108, CONSIDERING THE EFFECTS OF PRIOR YEAR
MISSTATEMENTS WHEN QUANTIFYING MISSTATEMENTS IN CURRENT YEAR FINANCIAL
STATEMENTS, which eliminates the diversity in practice surrounding the
quantification and evaluation of financial statement errors. The guidance
outlined in SAB 108 is effective for the Corporation in 2008 and is consistent
with our historical practices for assessing such matters when circumstances have
required such an evaluation. Accordingly, the Corporation does not believe that
adoption of SAB 108 will have any impact on the Corporation.
19
ITEM 7 - FINANCIAL STATEMENTS
-----------------------------
SUTRON CORPORTION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm 21
Consolidated Balance Sheets at December 31, 2007 and 2006 22
Consolidated Statements of Operations for the Years ended
December 31, 2007, 2006 and 2005 23
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 2007, 2006 and 2005 24
Consolidated Statements of Cash Flows for the Years ended
December 31, 2007, 2006 and 2005 25
Notes to Consolidated Financial Statements 26
20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Sutron Corporation and Subsidiary
Sterling, Virginia
We have audited the accompanying consolidated balance sheets of Sutron
Corporation and Subsidiary as of December 31, 2007 and 2006, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2007. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sutron Corporation and
Subsidiary as of December 31, 2007 and 2006, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2007, in conformity with U.S. generally accepted accounting principles.
/s/ Thompson, Greenspon & Co., P.C.
Fairfax, Virginia
March 27, 2008
21
SUTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2007 2006
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,299,904 $ 1,539,032
Restricted cash and cash equivalents 134,241 138,233
Accounts receivable, net 3,614,532 6,835,751
Inventory 4,114,014 3,402,017
Prepaid items and other assets 477,754 530,720
Deferred income taxes 312,000 333,000
------------ ------------
TOTAL CURRENT ASSETS 13,952,445 12,778,753
PROPERTY AND EQUIPMENT, AT COST 2,424,768 3,361,159
Accumulated depreciation and amortization (1,845,486) (2,740,941)
------------ ------------
Property and equipment, net 579,282 620,218
OTHER ASSETS 99,308 50,576
------------ ------------
TOTAL ASSETS $ 14,631,035 $ 13,449,547
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 823,114 $ 1,398,285
Accrued payroll 285,829 317,974
Other accrued expenses 995,123 1,506,950
Notes payable - current 38,381 50,722
Billings in excess of costs and estimated earnings 246,448 --
------------ ------------
TOTAL CURRENT LIABILITIES 2,388,895 3,273,931
LONG-TERM LIABILITIES
Notes payable, net of current maturities 2,075 37,678
Deferred income taxes 84,000 129,000
------------ ------------
TOTAL LONG-TERM LIABILITIES 86,075 166,678
------------ ------------
TOTAL LIABILITIES 2,474,970 3,440,609
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 45,257 44,946
Additional paid-in capital 2,694,416 2,559,281
Retained earnings 9,484,811 7,417,878
Accumulated other comprehensive loss (68,419) (13,167)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 12,156,065 10,008,938
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,631,035 $ 13,449,547
============ ============
See accompanying notes to consolidated financial statements.
22
SUTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
2007 2006 2005
------------ ------------ ------------
NET SALES AND REVENUES $ 18,868,101 $ 19,406,638 $ 15,434,255
COST OF SALES AND REVENUES 11,219,321 12,055,829 8,998,869
------------ ------------ ------------
Gross profit 7,648,780 7,350,809 6,435,386
------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative expenses 3,312,088 2,936,925 2,911,209
Research and development expenses 1,293,207 1,358,624 1,321,591
------------ ------------ ------------
Total operating expenses 4,605,295 4,295,549 4,232,800
------------ ------------ ------------
Operating income 3,043,485 3,055,260 2,202,586
FINANCING INCOME, NET 121,448 68,394 22,708
------------ ------------ ------------
Income before income taxes 3,164,933 3,123,654 2,225,294
INCOME TAX EXPENSE (1,098,000) (674,000) (755,000)
------------ ------------ ------------
NET INCOME $ 2,066,933 $ 2,449,654 $ 1,470,294
============ ============ ============
NET INCOME PER SHARE:
Basic income per share $ .46 $ .56 $ .34
============ ============ ============
Diluted income per share $ .41 $ .51 $ .30
============ ============ ============
See accompanying notes to consolidated financial statements.
23
SUTRON CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
Accumulated
Additional Other
Common Stock Paid-In Retained Comprehensive
Shares Par Value Capital Earnings Income (Loss) Total
--------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 2004 4,289,551 $ 42,896 $ 2,306,655 $ 3,497,930 $ 4,149 $ 5,851,630
------------
Comprehensive income:
Net income -- -- -- 1,470,294 -- 1,470,294
Cumulative translation
adjustment -- -- -- -- (5,820) (5,820)
------------
Total comprehensive
income 1,464,474
------------
Stock options exercised 5,000 50 5,575 -- -- 5,625
--------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 2005 4,294,551 42,946 2,312,230 4,968,224 (1,671) 7,321,729
------------
Comprehensive income:
Net income -- -- -- 2,449,654 -- 2,449,654
Cumulative translation
adjustment -- -- -- -- (11,496) (11,496)
------------
Total comprehensive
income 2,438,158
------------
Stock based compensation -- -- 36,081 -- -- 36,081
------------
Stock options exercised 200,000 2,000 210,970 -- -- 212,970
--------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 2006 4,494,551 44,946 2,559,281 7,417,878 (13,167) 10,008,938
------------
Comprehensive income:
Net income -- -- -- 2,066,933 -- 2,066,933
Cumulative translation
adjustment -- -- -- -- (55,252) (55,252)
------------
Total comprehensive
income 2,011,681
------------
Stock based
compensation -- -- 50,196 -- -- 50,196
Stock options exercised 31,081 311 84,939 -- -- 85,250
--------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 2007 4,525,632 $ 45,257 $ 2,694,416 $ 9,484,811 $ (68,419) $ 12,156,065
==================================================================================================
See accompanying notes to consolidated financial statements.
24
SUTRON CORPORTION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
2007 2006 2005
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,066,933 $ 2,449,654 $ 1,470,294
Noncash items included in net income:
Depreciation and amortization 208,135 206,088 209,646
Deferred income taxes (24,000) (95,000) (102,000)
Stock based compensation 50,196 36,081 --
(Gain) loss on disposal of property (7,483) -- 2,931
Changes in current assets and liabilities:
Accounts receivable 3,221,219 (3,124,325) 44,013
Inventory (711,997) (869,493) (161,048)
Prepaid items and other assets 52,966 (36,773) (225,795)
Accounts payable (575,171) 553,774 (99,105)
Accrued expenses (543,972) 449,846 (298,302)
Billings in excess of costs and estimated earnings 246,448 -- --
------------ ------------ ------------
Net Cash Provided (Used) by Operating Activities 3,983,274 (430,148) 840,634
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash and cash equivalents 3,992 95,142 152,647
Purchase of property and equipment (176,719) (139,074) (111,985)
Other assets (48,732) (1,953) 4,372
Proceeds from the sale of property and equipment 17,003 -- 2,000
------------ ------------ ------------
Net Cash Provided (Used) by Investing Activities (204,456) (45,885) 47,034
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (47,944) (48,036) (58,995)
Proceeds from stock options exercised 85,250 212,970 5,625
------------ ------------ ------------
Net Cash Provided (Used) by Financing Activities 37,306 164,934 (53,370)
------------ ------------ ------------
Effect of exchange rate changes on cash and cash
equivalents (55,252) (11,496) (5,820)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,760,872 (322,595) 828,478
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,539,032 1,861,627 1,033,149
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,299,904 $ 1,539,032 $ 1,861,627
============ ============ ============
NONCASH INVESTING/FINANCING ACTIVITIES
Purchase of property and equipment via issuance
of note payable $ -- $ -- $ 80,152
============ ============ ============
See accompanying notes to consolidated financial statements.
25
SUTRON CORPORATION AND SUBISIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Sutron Corporation (the "Company") was incorporated on December 30, 1975, under
the General Laws of the Commonwealth of Virginia. The Company operates from its
headquarters located in Sterling, Virginia. The Company has several branch
offices located throughout the United States, a branch office in India and a
wholly owned subsidiary in India. The Company is a leading provider of real-time
data collection and control products, systems software and professional services
in the hydrological, meteorological and oceanic monitoring markets. The
Company's products include data loggers, satellite transmitters/loggers, water
level and meteorological sensors, tides systems and systems and applications
software. Customers consist of a diversified base of Federal, state, local and
foreign government agencies, universities and hydropower companies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Sutron Hydromet Systems Private Limited. All
intercompany balances and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
The Company's revenue recognition policy is consistent with the requirements of
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements," Statement of Position No. 97-2 (SOP 97-2), "Software Revenue
Recognition," and other applicable revenue recognition guidance and
interpretations. In general, the Company records revenue when it is realized, or
realizable, and earned. The Company considers these requirements met when
persuasive evidence of an arrangement exists, the products or services have been
provided to the customer, the sales price is fixed or determinable and
collectibility is reasonably assured. The Company's revenue reflects reductions
attributable to discounts and customer returns.
For the Company's products, consisting of both equipment and software, revenue
is recognized upon shipment, delivery, installation or customer acceptance of
the product, as agreed in the customer order or contract. Sutron does sell its
software products without the related equipment although software products are
integral to systems. The Company's typical system requires no significant
production, modification or customization of the software or hardware. For
complex systems, revenue is deferred until customer acceptance. The Company does
provide customer discounts and does allow for product returns. The Company does
not do consignment sales or bill and hold. Revenue reflects reductions due to
discounts and product returns. Product returns have historically been
insignificant in amount.
The Company's sales arrangements for systems often include services in addition
to equipment and software. These services could include equipment integration,
software customization, installation, maintenance, training, and customer
support. For sales arrangements that include bundled hardware, software and
services, Sutron accounts for any undelivered service offering as a separate
element of a multiple-element arrangement. Amounts allocated to each element are
based on its objectively determined fair value, such as the sales price for the
product or service when it is sold separately. Revenue for these services is
typically recognized ratably over the period benefited or when the services are
complete.
The Company uses the percentage of completion method for recognizing revenue and
profits when it performs on fixed price contracts that extend over a number of
years. Under the percentage of completion method, revenue and profits are
recorded as costs are incurred based on estimates of total sales value and costs
at completion where total profit can be estimated with reasonable accuracy and
ultimate realization is reasonably assured. Profit estimates are revised
periodically based upon changes and facts, and any losses on contracts are
recognized immediately. Contracts may contain provisions to earn incentive and
award fees if targets are achieved. Incentive and award fees that can be
reasonably estimated are recorded over the performance period of the contract.
Incentive and award fees that cannot be reasonably estimated are recorded when
awarded. The Company recognizes revenue from time-and-materials contracts to the
extent of billable rates, times hours delivered, plus direct materials costs
incurred. Some
26
of the contracts include provisions to withhold a portion of the contract value
as retainage. The Company's policy is to take into revenue the full value of the
contract, including any retainage, as it performs against the contract. Contract
costs include allocated indirect costs. Anticipated losses on all contracts are
recognized as soon as they become known. Costs rendered on contracts in excess
of related billings are reflected as costs in excess of billings.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, cash equivalents include time
deposits and all highly liquid debt instruments with original maturities of
three months or less. Interest paid approximated $200 for the years ended
December 31, 2007, 2006 and 2005. Income taxes paid approximated $683,000,
$663,000 and $1,292,000 for the years ended December 31, 2007, 2006 and 2005,
respectively. Foreign income tax paid approximated $40,000, $74,000 and $24,000
for the years ended December 31, 2007, 2006 and 2005, respectively.
RESTRICTED CASH
For the years ended December 31, 2007 and 2006, the Corporation submitted
contract proposals that require bid bonds or bank guarantees. At December 31,
2007 and 2006, $134,241 and $48,753, respectively, of the cash and cash
equivalents balance is restricted for these bid bonds. At December 31, 2006,
$89,480 is restricted for protest bonds.
ACCOUNTS RECEIVABLE
Based on management's evaluation of uncollected accounts receivable at the end
of each year, bad debts are provided for utilizing the allowance method. The
allowance for doubtful accounts as of December 31, 2007 and 2006 approximate
$59,000 and $107,000, respectively. At December 31, 2007 and 2006, the
Corporation's investment in accounts 90 days or more past due is $1,070,808 and
$1,030,402, respectively, net of contract retainages.
INVENTORY
Inventory is stated at the lower of cost or market. Electronic components costs,
work in process and finished goods costs consist of materials, labor and
overhead and are recorded at a standard cost that approximates the average cost
method. The Company provides allowances on inventories for any material that has
become obsolete or may become unsaleable based on estimates of future demand and
sale price in the market. The allowance for obsolete or unsaleable inventory as
of December 31, 2007 and 2006 approximate $635,000 and $504,000, respectively.
PROPERTY AND EQUIPMENT
Equipment is recorded at cost and depreciated over their estimated useful lives,
ranging from three to seven years, using the straight-line method for financial
statement purposes, and the straight-line and accelerated methods for income tax
purposes. Expenditures for maintenance, repairs, and improvements that do not
materially extend the useful lives of the assets are charged to earnings as
incurred. When items of property and equipment are disposed of, the cost of the
asset and the related accumulated depreciation are removed from the accounts.
Any gain or loss resulting from the removal from service is taken into the
current period earnings.
INCOME TAXES
The Company utilizes an asset and liability approach to accounting for income
taxes. The objective is to recognize the amount of income taxes payable or
refundable in the current year based on the Company's income tax return and the
deferred tax liabilities and assets for the expected future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The asset and liability method accounts for deferred income taxes by
applying enacted statutory rates to temporary differences, the difference
between financial statement amounts and tax basis of assets and liabilities. The
resulting deferred tax liabilities or assets are classified as current or
noncurrent based on the classification of the related asset or liability.
Deferred income tax liabilities or assets are adjusted to reflect changes in tax
laws or rates in the year of enactment.
27
CAPITAL
The Company has 12,000,000, $.01 par value, shares authorized. There were
4,525,632 shares issued and outstanding at December 31, 2007, 4,494,551 shares
issued and outstanding at December 31, 2006 and 4,294,551 shares issued and
outstanding at December 31, 2005.
FOREIGN CURRENCY TRANSLATION
Results of operations for the Company's foreign branch office and foreign
wholly-owned subsidiary are translated from the designated functional currency
to the U.S. dollar using average exchange rates during the period, while assets
and liabilities of the foreign branch office and foreign wholly-owned subsidiary
are translated at the exchange rate in effect at the reporting date. Resulting
gains or losses from translating foreign currency financial statements are
included in other comprehensive income (loss), net of any related tax effect.
FINANCIAL INSTRUMENTS
The estimated fair value of cash and cash equivalents, accounts receivable,
accounts payable, other accrued expenses, and short term notes payable
approximate their carrying amounts in the financial statements. Based on the
borrowing rates currently available to the Company for debt with similar
maturity dates and collateral, the estimated fair value of long-term debt is
$2,000 and $38,000 at December 31, 2007 and 2006, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could vary from the estimates that were
used.
EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
128 that establishes standards for computing and presenting earnings per share
(EPS) for entities with publicly held common stock. The standard requires
presentation of two categories of earnings per share, basic EPS and diluted EPS.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the year. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company.
STOCK COMPENSATION PLANS
Effective January 1, 2006, the Corporation adopted the provisions of Statement
of Financial Accounting Standards No. 123 (revised 2004), SHARED-BASED PAYMENT,
(SFAS 123(R)), which requires the measurement and recognition of compensation
expense for all share-based payment awards to employees and directors based on
estimated fair values. Additionally, the Corporation follows the Securities and
Exchange Commission's Staff Accounting Bulletin No. 107, SHARE-BASED PAYMENT
(SAB 107), issued in March 2005, which provides supplemental SFAS 123(R)
application guidance based on the views of the SEC. The Corporation adopted SFAS
123(R) using the modified prospective transition method. Under this transition
method, share-based compensation expense recognized during the year ended
December 31, 2007 included: (a) compensation expense for all share-based awards
granted prior to, but not yet vested, as of January 1, 2006, based on the grant
date fair value estimated in accordance with the original provisions of SFAS
123, and (b) compensation expense for all share-based awards granted beginning
January 1, 2006, based on the grant date fair value estimated in accordance with
the provisions of SFAS 123(R). In accordance with the modified prospective
transition method, the Corporation's consolidated financial statements for prior
periods have not been restated to reflect the impact of SFAS 123(R).
Prior to January 1, 2006, the Corporation accounted for stock option awards
granted under the Corporation's stock compensation plans in accordance with the
recognition and measurement provisions of Accounting Principles Board
28
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, (APB 25) and related
Interpretations, as permitted by Statement of Financial Accounting Standards No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, (SFAS 123). Share-based employee
compensation expense was not recognized in the Corporation's consolidated
statements of operations prior to January 1, 2006, as all stock option awards
granted had an exercise price equal to or greater than the market value of the
common stock on the date of the grant (other than for certain option
modifications resulting in exercise prices below the fair market value at the
date of modification). As permitted by SFAS 123, the Corporation reported
pro-forma disclosures presenting results and earnings per share as if the
Corporation had used the fair value recognition provisions of SFAS 123 in the
Notes to Consolidated Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 159. In February 2007, the Financial Account Standards Board (FASB) issued
SFAS No. 159, THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL
LIABILITIES. SFAS 159 permits entities to choose to measure many financial
instruments, and certain other items, at fair value. SFAS 159 applies to
reporting periods beginning after November 15, 2007. The adoption of SFAS 159 is
not expected to have a material impact on the Corporation's financial condition
or results of operations.
SFAS 157. In September 2006 the FASB issued its SFAS No. 157, FAIR VALUE
MEASUREMENTS (SFAS 157). This Statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. SFAS 157 applies
under other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS 157 does not require any new fair value measurements. However,
for some entities, the application of this Statement will change current
practice. SFAS 157 is effective for fiscal years beginning after November 15,
2007. The Corporation does not expect that adoption of this standard will have a
material impact on its financial position, operations or cash flows.
SAB 108. In September 2006, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 108, CONSIDERING THE EFFECTS OF PRIOR YEAR
MISSTATEMENTS WHEN QUANTIFYING MISSTATEMENTS IN CURRENT YEAR FINANCIAL
STATEMENTS, which eliminates the diversity in practice surrounding the
quantification and evaluation of financial statement errors. The guidance
outlined in SAB 108 is effective for the Corporation in 2008 and is consistent
with our historical practices for assessing such matters when circumstances have
required such an evaluation. Accordingly, the Corporation does not believe that
adoption of SAB 108 will have any impact on the Corporation.
2. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, consists of the following:
2007 2006
------------ ------------
Current $ 2,647,063 $ 5,185,171
Costs in excess of billings and
estimated earnings 761,207 1,294,443
Contract retainage 206,262 356,137
------------ ------------
Totals $ 3,614,532 $ 6,835,751
============ ============
29
3. INVENTORY
Inventory consists of the following at December 31:
2007 2006
------------ ------------
Electronic components $ 1,639,015 $ 1,593,899
Work in process 1,556,321 1,407,541
Finished goods 918,678 400,577
------------ ------------
Totals $ 4,114,014 $ 3,402,017
============ ============
4. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 is as follows:
2007 2006
------------ ------------
Furniture, fixtures and equipment $ 1,949,776 $ 2,867,053
Vehicles 364,134 400,271
Leasehold improvements 110,858 93,835
------------ ------------
Totals $ 2,424,768 $ 3,361,159
============ ============
Accumulated depreciation and amortization at December 31, is as follows:
2007 2006
------------ ------------
Furniture, fixtures and equipment $ 1,543,053 $ 2,469,562
Vehicles 256,136 228,964
Leasehold improvements 46,297 42,415
------------ ------------
Totals $ 1,845,486 $ 2,740,941
============ ============
Depreciation and amortization expense totaled $208,135, $206,088and $209,646 for
the years ended December 31, 2007, 2006 and 2005, respectively.
5. LINE OF CREDIT
The Company has a $3,000,000 line of credit with a commercial bank. The line of
credit is collateralized by substantially all of the assets of the Company and
expires August 2008. Under the terms of the line of credit, the Company is
required to maintain certain financial covenants. Interest is charged at the
bank's prime rate and is payable monthly. There was no balance outstanding at
December 31, 2007 or 2006.
The Company frequently bids on and enters into international contracts that
require bid and performance bonds. At December 31, 2007 and 2006, a commercial
bank had issued standby letters of credit in the amount of $1,652,818 and
$532,300 that served as either bid or performance bonds. The amount available
under the line of credit is reduced by this amount.
6. OTHER ACCRUED EXPENSES
Components of other accrued expenses consist of the following at December 31:
2007 2006
------------ ------------
Accrued vacation pay $ 218,278 $ 182,980
Accrued profit sharing -- 100,000
Accrued warranty costs 226,000 288,000
Customer advance payments 224,972 907,133
Federal income taxes payable 303,015 --
Other accruals 22,858 28,837
------------ ------------
Totals $ 995,123 $ 1,506,950
============ ============
7. ACCRUED WARRANTY COSTS
The Company warranties its products for up to two years and estimated warranty
costs are based upon management's best estimate of the amounts necessary to
settle future and existing claims on equipment sold as of the balance sheet
date. Factors considered include actual past experience of product returns and
the related estimated cost of labor and material to make the necessary repairs
as well as technological advances and enhanced design and manufacturing
processes. If actual future product return rates or the actual costs of material
and labor differ from the estimates, adjustments to the accrued warranty
liability are made. Changes to the product warranty
30
reserve are identified below and represent adjustments to the reserve based on
management estimates and other factors as noted above:
Balance as of December 31, 2005 $ 288,000
Reserve adjustment --
------------
Balance as of December 31, 2006 288,000
Reserve adjustment (62,000)
------------
Balance as of December 31, 2007 $ 226,000
============
8. NOTES PAYABLE
Notes payable consist of the unpaid balances of notes from various finance
companies for vehicle acquisitions and are secured by the underlying vehicles.
Monthly installments range from $259 to $800 and include interest from 0 percent
to 5.61 percent. The balances outstanding at December 31 are as follows:
2007 2006
------------ ------------
Long-term maturities $ 2,075 $ 37,678
Current maturities 38,381 50,722
------------ ------------
Totals $ 40,456 $ 88,400
============ ============
Principal payments required over the remaining payment periods as of December 31
are as follows:
Years ending December 31:
2008 $ 38,381
2009 2,075
------------
Total $ 40,456
============
9. LEASE OBLIGATIONS
The Company leases space for its headquarters and production facilities, which
expire in March 2009. The operating lease calls for monthly rent of $12,616 and
increases three percent per annum, thereafter. The lease agreement includes
additional rent payments based on a pro rata portion of maintenance fees and
operating expenses on the land and building. The Company leases additional
office and warehouse space in Sterling, Virginia. The lease expires in March
2009 and requires monthly rent payments of $5,500.
The Company leases office and warehouse space in West Palm Beach, Florida. The
four-year lease, expiring in August 2008, requires monthly payments of $5,827.
The Company entered into a lease agreement for office space in Brandon, Florida.
The five-year lease, expiring on December 31, 2008, requires monthly payments of
$1,984 and increases of four percent per annum, thereafter.
The Corporation entered into lease agreements for office space and furniture in
New Delhi, India in September 2006. The three-year leases, expiring in August
2009, require monthly payments of approximately $1,518. Both leases include an
option to renew for another period of three years with a twenty percent increase
in rent. The following is a schedule of future minimum lease payments by year:
Years ending December 31:
2008 314,093
2009 68,802
------------
Total $ 382,895
============
Rent expense amounted to $332,999, $315,903and $307,695 for the years ended
December 31, 2007, 2006 and 2005, respectively.
31
10. INCOME TAXES
The income tax (expense) benefit charged to operations for the years ended
December 31, were as follows:
2007 2006 2005
------------ ------------ ------------
Current income tax expense $ (1,122,000) $ (769,000) $ (857,000)
Deferred tax benefit (expense) 24,000 95,000 102,000
------------ ------------ ------------
Total income tax (expense) benefit $ (1,098,000) $ (674,000) $ (755,000)
============ ============ ============
Deferred tax assets, are comprised of the following at December 31:
2007 2006 2005
------------ ------------ ------------
Accrued vacation and warranty $ 173,000 $ 184,000 $ 193,000
Accounts receivable and inventory
allowances 139,000 149,000 85,000
------------ ------------ ------------
Gross deferred tax assets 312,000 333,000 278,000
Gross deferred tax liability -
depreciation (84,000) (129,000) (169,000)
------------ ------------ ------------
Net deferred tax assets $ 228,000 $ 204,000 $ 109,000
============ ============ ============
The realization of the deferred tax assets is dependent on future taxable
earnings. The Company has not provided for a deferred tax asset valuation
allowance due to their current and anticipated future earnings.
A reconciliation between the amount of reported income tax expense and the
amount computed by multiplying the applicable statutory Federal income tax rate
is as follows:
2007 2006 2005
------------ ------------ ------------
Income before income taxes $ 3,164,933 $ 3,123,654 $ 2,225,294
Applicable statutory tax rate 34% 34% 34%
------------ ------------ ------------
Computed "expected" Federal income
tax Expense (1,076,000) (1,062,000) (757,000)
Adjustments to Federal income tax
resulting from:
State income tax expense (184,000) (120,000) (111,000)
Tax credits 106,000 68,000 113,000
Stock compensation 56,000 440,000 --
------------ ------------ ------------
Income tax (expense) benefit $ (1,098,000) $ (674,000) $ (755,000)
============ ============ ============
11. MAJOR CUSTOMERS
Set forth below are customers, including agencies of the U.S. Government, from
which the Company received more than ten percent of total revenue, reported in
the Hydromet Products and Integrated Systems segments, for the years ended
December 31:
2007 2006 2005
------------ ------------ ------------
Department of Interior 21% 17% 22%
International 40% 36% 25%
Commercial 27% 23% 31%
Department of Commerce -- -- 16%
Department of Defense -- 16% --
Set forth below are customers, including agencies of the U.S. Government, from
which the Company had more than ten percent of total accounts receivable
outstanding for the years ended December 31, 2007 and 2006:
2007 2006
------------ ------------
Islamic Republic of Afghanistan $ 798,656 $ --
South Florida Water Management $ -- $ 410,759
US Army Corps of Engineers $ -- $ 676,757
National Oceanic and Atmospheric
Administration $ -- $ 592,607
32
At December 31, 2007, unbilled accounts receivable of approximately $695,000 and
$1,190,000, respectively, is from the Government of India Central Water
Commission.
12. CONCENTRATIONS
At times throughout the year, cash and cash equivalents exceeded FDIC insurance
limits. As of December 31, 2007 and 2006, the Corporation's cash deposits
exceeded the FDIC insured amount by approximately $4,718,000 and $867,000,
respectively.
The Corporation's products use certain standard and application specific
components that are acquired from one or a limited number of sources. The
Corporation has generally been able to procure adequate supplies of these
components in a timely manner from existing sources. The Corporation's inability
to obtain a sufficient quantity of components when required or to develop
alternative sources at acceptable prices and within a reasonable time, could
result in delays or reductions in product shipments which could materially
affect the Corporation's operating results in any given period.
13. STOCK OPTION PLANS
The Corporation 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 Corporation. The authorized and granted options under each of these plans
are as follows:
Authorized Granted
------------ ------------
1996 Plan 260,000 259,000
1997 Plan 60,000 60,000
2002 Plan 650,000 500,333
During 2005, the 2002 Stock Option Plan was amended to authorize an additional
250,000 shares from the original 400,000 shares. In addition, all three plans
were amended in 2005 to allow Directors to participate in the plan, and that
vesting schedules will be determined by the Board at the time each individual
option is granted. Shares under all of the plans may be granted at not less than
100 percent of the fair market value at the grant date. All options have a
ten-year term from the date of grant. Prior to the 2005 amendments, options
vested ratably over five years on each anniversary date the option was granted.
The Corporation elected to accelerate vesting of all outstanding options as of
December 31, 2005, as permitted under the plans. Cancelled or expired options
are able to be reissued.
As discussed in Note 1, STOCK COMPENSATION PLANS, effective January 1, 2006, the
Corporation adopted the fair value recognition provision of SFAS 123(R), using
the modified prospective transition method. The adoption of SFAS 123(R) resulted
in share-based compensation expense associated with options for the years ended
December 31, 2007 and 2006 of $50,196 and $36,081, respectively which was
recorded to general and administrative expenses. This expense decreased basic
and diluted earnings per share by $0.01 for the years ended December 31, 2007
and 2006.
The vesting period of the remaining options is as follows:
Vested and exercisable 537,419
2008 14,166
2009 10,000
2010 10,000
2011 10,000
2012 1,667
------------
Total 583,252
============
33
The fair value of Sutron Corporation stock options used to recognize
compensation expense in 2007 and 2006 and to compute pro forma net income and
earnings per share disclosures for 2005 is the estimated present value at grant
date using the Black-Scholes pricing model, with the following assumptions:
2007 2006 2005
(Compensation) (Compensation) (Pro forma)
------------ ------------ ------------
Risk free rate 4.5 - 5.16% 5.16% 4.1%
Expected volatility 30% 30% 32%
Dividend yield 0% 0% 0%
Holding period 10 years 10 years 5 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:
2005
------------
Net income As reported $ 1,470,294
Pro forma 1,418,960
Earnings per share
- Basic As reported $ .34
- Basic Pro forma $ .33
- Diluted As reported $ .30
- Diluted Pro forma $ .29
The following summarizes the option activity under these plans for the last
three years:
Weighted
Option Average
Price Number of Exercise
Per Share Shares Price
------------ ------------ ------------
Outstanding, December 31, 2004 $ .40 - 2.80 719,000 $ .76
Grants 5.50 - 7.45 28,333 $ 6.53
Exercised 1.125 5,000 $ 1.13
Cancelled or expired 1.125 3,000 $ 1.13
------------ ------------ ------------
Outstanding, December 31, 2005 .40 - 7.45 739,333 $ .98
Grants 7.80 15,000 $ 7.80
Exercised .40 - 1.125 200,000 $ 1.06
Cancelled or expired -- -- --
------------ ------------ ------------
Outstanding, December 31, 2006 .55 - 7.80 554,333 $ 1.13
Grants 6.90 - 7.60 65,000 $ 6.48
Exercised .65 - 5.50 31,081 $ 2.74
Cancelled or expired 7.60 5,000 $ 7.60
------------ ------------ ------------
Outstanding, December 31, 2007 $ .55 - 7.80 583,252 $ 1.65
============ ============ ============
The weighted average fair value of options granted during the three years is as
follows:
December 31, 2005 $ 2.97
December 31, 2006 $ 4.12
December 31, 2007 $ 3.55
The weighted average remaining contractual life of options outstanding at
December 31, 2007 is 6.5 years.
34
14. EARNINGS PER SHARE
The following table shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average number of shares
of potential dilutive common stock.
Years Ended December 31,
------------------------------------------
2007 2006 2005
------------ ------------ ------------
Net income $ 2,066,933 $ 2,449,654 $ 1,470,294
Shares used in calculation of income
per share:
Basic 4,512,578 4,341,534 4,292,051
Effect of dilutive options 469,652 469,109 641,761
------------ ------------ ------------
Diluted 4,982,230 4,810,643 4,933,812
Net income per share:
Basic $ .46 $ .56 $ .34
Diluted $ .41 $ .51 $ .30
Contracts to issue common stock that are anti-dilutive in nature are not
included in the earnings per share calculations.
15. PROFIT SHARING PLAN
The Corporation has a profit-sharing retirement plan that covers substantially
all employees of the Corporation. The Plan includes a 401(k) provision under
which employees may elect to defer a portion of their compensation. The Plan was
amended in May 2006 to allow for employer matching of up to 4 percent as
determined in the Plan. The profit-sharing contribution is determined each year
by the Board of Directors based on profits. The Corporation made a profit
sharing contribution for the years ended December 31, 2006 and 2005 of $100,000
and $188,000, respectively. The Corporation did not make a profit sharing
contribution for the year ended December 31, 2007. The employer matching
contribution was approximately $156,000 and $73,000 for the years ended December
31, 2007 and 2006.
16. SEGMENT INFORMATION
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about
Segments of an Enterprise and Related Information establishes standards for the
manner in which public companies report information about operating segments in
annual and interim financial statements. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The method for determining what information to report is based on the
way management organizes the operating segments within the Company for making
operating decisions and assessing financial performance.
The Company's chief operating decision-maker is considered to be the Company's
chief executive officer (CEO). The CEO reviews financial information presented
based on divisions, comprised of products and/or services. Nearly all of the
Company's operations and assets are located at its headquarters location.
Therefore, indirect costs are not allocated among segments.
The Company currently reports its results in four divisions: Hydromet Products,
Integrated Systems, Hydrological Services and Sutron India Operations. Hydromet
Products division is responsible for the manufacture and sale of the Company's
products including dataloggers, satellite transmitters, sensors and tides
systems. The Integrated Systems division is responsible for systems design,
integration, installation, training and commissioning of turnkey
hydrometeorological systems. The Company's Hydrological Services division
provides data interpretation and analysis services including modeling, flood
forecasting and hydrologic studies. Sutron India Operations consists of the
branch office and wholly owned subsidiary and is responsible for the sale of
products, systems and services to customers in India. The results of these
segments are shown below (in thousands):
35
2007 2006 2005
------------ ------------ ------------
Revenue
Hydromet Products $ 10,019 $ 9,234 $ 9,305
Integrated Systems 6,303 6,153 3,277
Hydrological Services 1,974 2,214 2,639
Sutron India Operations 572 1,806 213
------------ ------------ ------------
Totals $ 18,868 $ 19,407 $ 15,434
============ ============ ============
Cost of Goods Sold
Hydromet Products $ 4,235 $ 4,508 $ 4,519
Integrated Systems 4,103 3,818 1,977
Hydrological Services 2,376 2,304 2,444
Sutron India Operations 505 1,426 59
------------ ------------ ------------
Totals $ 11,219 $ 12,056 $ 8,999
============ ============ ============
Gross Margin
Hydromet Products $ 5,784 $ 4,726 $ 4,786
Integrated Systems 2,200 2,335 1,300
Hydrological Services (402) (90) 195
Sutron India Operations 67 380 154
------------ ------------ ------------
Totals $ 7,649 $ 7,351 $ 6,435
============ ============ ============
17. EXPORT SALES
Export sales from the Company's operations at December 31, were as follow (in
thousands):
2007 2006 2005
------------ ------------ ------------
Central and South America $ 580 $ 1,269 $ 1,238
Canada 717 645 750
Asia 3,187 4,527 1,363
Australia/New Zealand -- -- 47
Europe and other 800 441 438
Middle East 2,248 -- --
------------ ------------ ------------
$ 7,532 $ 6,882 $ 3,836
============ ============ ============
18. LEGAL CONTINGENCIES
Various legal claims can arise from time to time in the normal course of
business which, in the opinion of management, will have no material effect on
the Company's financial statements. The Company has been named in a compensation
claim under the Indian Anti-Trust Law that is pending before The Monopolies and
Restrictive Trade Practices Commission in New Delhi, India. Management believes
that the case is unsubstantiated and does not anticipate that any material
losses will occur.
36
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
ITEM 8A - CONTROLS AND PROCEDURES
---------------------------------
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management (with the participation of our Chief Executive Officer and Chief
Financial Officer) evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), as of December 31, 2007,
the end of the fiscal period covered by this report on Form 10-KSB. The Company
maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Securities Exchange Act of 1934
reports are recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to our management, including our chief executive officer and
chief financial officer, as appropriate, to allow timely decisions regarding
required disclosure. Based on this evaluation, the chief executive officer and
chief financial officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
ITEM 8A(T). MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
-------------------------------------------------------------------------
REPORTING
---------
Management of Sutron Corporation is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934. Sutron's internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America. Internal control
over financial reporting includes those written policies and procedures that:
o pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
Sutron's assets;
o provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with accounting principles generally accepted in the United States of
America;
o provide reasonable assurance that receipts and expenditures of Sutron
are being made only in accordance with authorization of management and
directors of Sutron; and
o provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of assets that could
have a material effect on the consolidated financial statements.
Internal control over financial reporting includes the controls themselves,
monitoring and internal auditing practices and actions taken to correct
deficiencies as identified. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Management assessed the effectiveness of Sutron's internal control over
financial reporting as of December 31, 2007. Management based this assessment on
criteria for effective internal control over financial reporting described in
"Internal Control - Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Management's assessment included an
evaluation of the design of Sutron's internal control over financial reporting
and testing of the operational effectiveness of its internal control over
financial reporting. Management reviewed the results of its assessment with the
Audit Committee of our Board of Directors.
37
Based on this assessment, management determined that, as of December 31, 2007,
Sutron maintained effective internal control over financial reporting.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the SEC that
permit the Company to provide only management's report in this annual report.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial reporting that
occurred during the quarter ended December 31, 2007 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 8B - OTHER INFORMATION
---------------------------
None
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
-------------------------------------------------
The Board has adopted a Code of Conduct and Ethics that applies to Sutron's
principal executive officer, principal financial officer and all other employees
of the Company. This Code of Conduct and Ethics is posted on the Company's
website at http://www.sutron.com on the investors' page. Any amendments to the
Code of Ethics and waivers of the Code of Ethics for our principal executive,
accounting or financial officers will be published on our website.
The remainder of information required for this Item is incorporated by reference
to the Proxy Statement to be filed in connection with our 2008 Annual Meeting of
Shareholders.
ITEM 10 - EXECUTIVE COMPENSATION
--------------------------------
The information required for this Item is incorporated by reference to the Proxy
Statement to be filed in connection with our 2008 Annual Meeting of
Shareholders.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------
The information required for this Item is incorporated by reference to the Proxy
Statement to be filed in connection with our 2008 Annual Meeting of
Shareholders.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------
The information required for this Item is incorporated by reference to the Proxy
Statement to be filed in connection with our 2008 Annual Meeting of
Shareholders.
ITEM 13 - EXHIBITS
------------------
3(a) Copy of Articles of Incorporation of Sutron Corporation, received and
approved December 30, 1975
3(b) Copy of Articles of Amendment to the Articles of Incorporation and
Articles of Reduction of Stated Capital of Sutron Corporation received
and approved September 7, 1983
3(c) By-Laws of the Registrant
3(d) Copy of Articles of Amendment to the Articles of Incorporation received
and approved June 8, 1995
10.14 Stock Option Agreement between The Company and Andrew D. Lipman dated May
16, 2007 (filed herewith)
38
10.15 Stock Option Agreement between The Company and Robert F. Roberts, Jr.
dated May 16, 2007 (filed herewith)
10.16 Loan Modification Agreement dated June 26, 2007 between Sutron
Corporation and Branch Banking and Trust Company of Virginia, a North
Carolina Banking Corporation
23.1 Consent of Thompson, Greenspon & Co., P.C.
31.1 Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
Chairman of the Board of Directors, President and Chief Executive Officer
31.2 Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Chief
Financial Officer and Treasurer
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
------------------------------------------------
The information required for this Item is incorporated by reference to the Proxy
Statement to be filed in connection with our 2008 Annual Meeting of
Shareholders.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SUTRON CORPORATION
(REGISTRANT)
/s/ Raul S. McQuivey Date: March 31, 2008
-----------------------------
By: Raul S. McQuivey,
Chairman of the Board of Directors, President
and Chief Executive Officer
In accordance with the Securities Exchange Act, this report has been signed by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
/s/ Raul S. McQuivey Date: March 31, 2008
-----------------------------
By: Raul S. McQuivey,
Chairman of the Board of Directors, President
and Chief Executive Officer
/s/ Daniel W. Farrell Date: March 31, 2008
-----------------------------
By: Daniel W. Farrell, Director and Vice President
/s/ Andrew D. Lipman Date: March 31, 2008
-----------------------------
By: Andrew D. Lipman, Director
/s/ Leland R. Phipps Date: March 31, 2008
-----------------------------
By: Leland R. Phipps, Director
39
/s/ Robert F. Roberts, Jr. Date: March 31, 2008
-----------------------------
By: Robert F. Roberts, Jr., Director
/s/ Sidney C. Hooper Date: March 31, 2008
-----------------------------
By: Sidney C. Hooper, Chief Financial Officer
(Chief Financial and Accounting Officer)
40