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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______ to _______
Commission File Number 000-08193
SENSYTECH, INC.
---------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 38-1873250
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(State or other jurisdiction (I.R.S.
of Employer
incorporation or Identification
organization) No.)
</TABLE>
8419 TERMINAL ROAD, NEWINGTON, VIRGINIA 22122-1430
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 550-7000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Name of Exchange on
Title of Class Which Registered
-------------- ----------------
None None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenues for the fiscal year ended September 30, 2000 were
$22,706,000. As of November 16, 2000, there were 3,934,767 shares of the
Registrant's Common Stock, par value $.01 per share, outstanding. The aggregate
market value of the voting and non-voting shares of the Common Stock held by
non-affiliates and outstanding as of November 16, 2000, was $14,263,530. This
amount was computed using the average bid and ask price as of November 16, 2000,
as reported on the National Association of Securities Dealers, Inc. OTC Bulletin
Board.
DOCUMENTS INCORPORATED BY REFERENCE
Part III information will appear in the Registrant's Proxy Statement in
connection with its 2001 Annual Meeting of Stockholders. Such information will
be incorporated by reference as of the date of the filing of such Proxy
Statement.
Transitional Small Business Disclosure Format (check one):
Yes ___ No _X_
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SENSYTECH, INC. AND SUBSIDIARY
FORM 10-KSB ANNUAL REPORT
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM NO. PAGE NO.
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<S> <C>
PART I
1. Business................................................................ 4
2. Properties.............................................................. 8
3. Legal Proceedings....................................................... 9
4. Submission of Matters to a Vote of Security Holders..................... 9
PART II
5. Market for the Registrant's Common Stock and Related Security Holder
Matters................................................................. 10
6. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 10
7. Financial Statements and Supplementary Data............................. 13
8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures................................................... 13
PART III
Part III, Items 9 through 12, information will appear in the Registrant's
Proxy Statement in connection with its 2001 Annual Meeting of Stockholders.
Such Proxy Statement will be filed with the Securities and Exchange
Commission pursuant to Regulation 14A, and such information will be
incorporated herein by reference as of the date of such filing.............. 14
13. Exhibits and Reports on Form 8-K........................................ 15
Signatures.................................................................. 16
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL OVERVIEW
Sensytech, Inc. (also referred to as the "Company" and formerly known as
Sensys Technologies Inc.), a Delaware corporation, is the successor company to
Daedalus Enterprises, Inc. ("DEI") which was organized in 1968, and S.T.
Research Corporation ("STR") which was organized in 1972. On June 9, 1998, STR
acquired DEI (the "Acquisition"), and as a result of this overall transaction,
Sensytech, Inc. was organized. The transaction was accounted for as a reverse
acquisition. As a result of the Acquisition, the outstanding STR shares were
converted into approximately 86.5% of the issued and outstanding shares of DEI.
In connection with the Acquisition, the DEI shareholders voted to amend the DEI
Certificate of Incorporation to change the name of DEI to Sensys Technologies
Inc. and to increase the Company's authorized shares from 2,000,000 to
5,000,000. On September 16, 1999, the Company adopted its present name.
The Company defines, designs, develops and manufactures systems and
equipment for integrated passive surveillance systems for military and
commercial customers. Signals of interest within the electromagnetic spectrum
are intercepted by the Company's products. Pertinent information is then
evaluated and the relevant situation is assessed. Those signals of interest may
include radio waves, microwaves, infrared and light; the signals may be
intentional, under the control of the emitting system as in radar or
communication, or unintentional.
BASIC PRODUCTS AND SERVICES
The Company operates in one segment, the passive surveillance system
segment. The Company believes that its passive surveillance products and
services are among the best in the world. The Company's goal is to provide its
customers with total system surveillance solutions across the electromagnetic
spectrum, using products manufactured by it and by others. Within this segment,
the Company's principal products and services include:
- System engineering services which provide concept studies, system definition
and services to aid in specification of customer requirements. These
activities are performed for either present or prospective customers and are
principally undertaken to assist the customer in the procurement of major
integrated passive surveillance systems.
- Electronic support products which intercept, analyze, classify, identify,
localize and track microwave signals from radars and weapons. The Company's
electronic support measure systems are used on military platforms, such as
ships, submarines, patrol aircraft, and at ground installations, to
intercept, analyze and identify radar/weapon signals.
- Communication products which intercept signals, analyze the on-line
communication, and identify and localize the involved parties. These systems
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are generally employed in aircraft, ships and ground installations to
intercept transmissions occurring over established communications networks.
- Multispectral infrared and light imaging systems which are employed on land
and on aircraft for the remote sensing of damage assessment, environmental
pollution, facility inspection, utility monitoring, and situation awareness.
COMPETITION
Historically, the Company's products have been sold largely in the
United States, although its foreign business is increasing. The Company's
products face substantial competition from both domestic and foreign companies,
which range in size from highly resourceful small concerns, which engineer and
produce specialized items, to large diversified firms, with vastly greater
resources than the Company. In the domestic market, major competitors include
companies such as Raytheon Company, Lockheed Martin Corporation, Litton
Industries, Inc., Condor Systems, Inc., TRW Inc., and British Aerospace. In the
foreign market, a number of overseas companies are competitors, in addition to
those named above, such as Racal Communications (United Kingdom), Electronica
(Italy), Thompson-CFS and Dassault Electronique (France), and Daimler (Germany).
The size and reputation of these companies give them a significant advantage in
competing for contracts. The Company competes on the basis of product offerings,
price, product and systems quality, technology and pre- and post-sale customer
service. The Company has competed successfully as a prime contractor where it
believes it has a customer solution advantage; otherwise, the Company has teamed
with its traditional partners.
MATERIALS
The Company's operations primarily require electronic, optical, and
mechanical components and supplies, which are generally available from several
commercial sources. Although certain items are only available from limited
sources of supply, the Company believes that the loss of any single supplier
would not have a material adverse effect on the Company.
PATENTS
The Company holds several patents and has applied for others. The
Company has registered no trademarks. However, the Company believes that the
ownership of patents is not a significant factor in its business and that its
success depends primarily on innovative skills, technical competence, and the
ability to rapidly adapt commercially available new technology to emerging
requirements from its customers. The Company believes that the loss of patent
protection for any of its products would not materially adversely affect the
Company.
MARKETING
In the domestic market, business development of the Company's products
and services is conducted by its staff who concentrate on developing an
understanding of the customers particular requirements and maintaining close
response.
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In the international market, the domestic model is complemented with
marketing assistance for specific products from selected partners. Generally,
sales of systems for export must be approved by the U.S. Department of State,
which limits the markets for such products and may result in delay or possible
cancellation of an order.
PRODUCT DEVELOPMENT
The Company believes that its continued success depends, in a large
part, on its ability to develop and apply new technology to provide total system
solutions for its customers. Funding for products and systems development comes
from internally sponsored research with the majority of development being funded
through development contracts. Total research and development expenditures over
the past two years were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
2000 1999
---- ----
<S> <C> <C>
Internal research and development $ 932,000 $ 540,000
Customer-funded development 10,364,000 7,694,000
----------- ----------
Total $11,296,000 $8,234,000
=========== ==========
</TABLE>
Current funded programs include development of systems analysis, jamming
resistance, emitter's identification, communications intercept capabilities,
precision direction finding, and source localization.
BACKLOG
Total backlog of $7,033,000 at September 30, 2000, included both
unfilled firm orders for the Company's products for which funding has been
authorized and appropriated by the customer, including the remaining portion of
contracts in progress, and firm orders for which funding has not been
appropriated.
The Company has options of $44,265,000 primarily resulting from a
subcontract for engineering and production of components of the AIEWS systems
for U.S. Navy surface ships. Following development, the prime contractor holds
options for subsequent production. The Company anticipates that a portion of the
options will be exercised during the period 2002 through 2007. However, the
Company has no assurances that the options will be exercised.
GOVERNMENT CONTRACTS
During the most recent fiscal year, approximately 90% of the Company's
revenues were attributable to contracts with various departments and agencies of
the U.S. Government or subcontracts with its prime contractors. The funding of
Government programs is subject to Congressional appropriations. Although
multi-year contracts may be authorized in connection with major procurements,
Congress generally appropriates funds on a fiscal year basis, even though a
program may continue for many years. Consequently, programs are often only
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partially funded initially, and additional funds are committed only as
Congress makes further appropriations.
Generally, Government contracts are subject to oversight audits by
Government representatives and provisions permitting termination, in whole or in
part, without prior notice at the Government's convenience upon the payment of
compensation only for work done and commitments made at the time of termination.
In the event of termination, the contractor will receive some allowance for
profit on the work performed.
The Company's federal government contracts include fixed price, cost
plus fixed fee, cost plus incentive fee, cost plus award fee, and time and
material contracts. The fixed price contracts are not subject to adjustment by
reason of costs incurred in the performance of the contract. With this type of
contract, the Company assumes the risk that it will be able to perform at a cost
below the fixed price, except for costs incurred because of contract changes
ordered by the customer.
The Company is subject to various statutes and regulations governing
Government contracts generally and defense contracts specifically, which carry
substantial penalty provisions including suspension or debarment from Government
contracting or subcontracting for a period of time, in the event the Company is
found to have violated any of these regulations. Among the causes for debarment
are violations of various statutes, including those related to procurement
integrity, export control, government security regulations, employment
practices, the protection of the environment, the accuracy of records, and the
recording of costs. The Company carefully monitors all of its contracts and
contractual efforts to minimize the possibility of any abuse in connection with
its government contracts. The Company has experienced minimal audit adjustments
over the past ten years. The Defense Contract Audit Agency ("DCAA") has
completed its audit of the Company's contracts through the fiscal year ended
September 30, 1998.
Companies which are engaged in supplying defense-related equipment to
the Government are subject to certain business risks, some of which are peculiar
to that industry. Among these are: the cost of obtaining trained and skilled
employees; the uncertainty and instability of prices for raw materials and
supplies; the problems associated with advanced designs, which may result in
unforeseen technological difficulties and cost overruns; and the intense
competition and the constant necessity for improvement in facilities and
personnel training. Sales to the Government may be affected by changes in
procurement policies, budget considerations, changing concepts of national
defense, social and economic developments abroad and other factors.
As a result of changing domestic and international conditions, the
Department of Defense budgets have been subject to increasing pressure. However,
the Company believes the passive surveillance markets in which it participates
will continue to be important in future years, as the military branches and
intelligence agencies continue to rely upon technological advances for defense
and intelligence purposes. There can be no assurances, however, that federal
appropriations will continue to exist at their current levels or that the
Company's products will be utilized in the future.
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FORWARD-LOOKING STATEMENTS
Statements in this filing which are not historical facts are
forward-looking statements under the provisions of the Private Securities
Litigation Reform Act of 1995. All forward- looking statements involve risks and
uncertainties. These statements are based upon numerous assumptions about future
conditions that could prove not to be accurate. Actual events, transactions or
results may materially differ from the anticipated events, transactions or
results described in such statements. The Company's ability to consummate such
transactions and achieve such events or results is subject to certain risks and
uncertainties. In addition to those specifically mentioned above, such risks and
uncertainties include, but are not limited to, the existence of, demand for, and
acceptance of the Company's products and services, regulatory approvals and
developments, economic conditions, the impact of competition and pricing,
results of financing efforts and other factors affecting the Company's business
that are beyond the Company's control. The Company undertakes no obligation and
does not intend to update or revise these forward-looking statements to reflect
future events or circumstances.
ENVIRONMENTAL
The Company's operations do not include any activities which result in
material environmental issues. As a result, the Company has incurred no material
costs in the past two years related to environmental compliance.
EMPLOYEES
At September 30, 2000, the Company employed 114 persons. Many of the
Company's employees are highly skilled, with advanced degrees. The Company's
continued success depends upon its ability to continue to attract and retain
highly skilled employees. The Company has never had a work stoppage, and none of
its employees are represented by a labor organization. The Company considers its
employee relations to be good.
ITEM 2. PROPERTIES
The Company believes that its leased facilities are suitable for their
respective operations. Each facility is well maintained and capable of
supporting higher levels of revenue. The table below sets forth certain
information about the Company's principal facilities:
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<TABLE>
<CAPTION>
OWNED PRINCIPAL
ADDRESS SQUARE FEET OR LEASED DESCRIPTION ACTIVITY
------------------- ----------- --------- ------------------- --------------
<S> <C> <C> <C> <C>
8419 Terminal Road 67,000 Leased, Two 1-story and one Engineering/
Newington, VA 22122 Expiration partial 2-story Manufacturing/
Date: adjacent block Administration
6/30/2014 buildings. Buildings
are in an industrial
park
300 Parkland Plaza 12,500 Leased, 1-story facility in Engineering/
Ann Arbor, MI 48103 Expiration a research park Manufacturing/
Date: Administration
11/30/2003
</TABLE>
The Company's facilities in Newington and Ann Arbor are equipped with
equipment used for the design, development and manufacture of its products.
Facilities in Newington include a Sensitive Compartmented Information Facility
("SCIF"), anechoic chamber, secure test areas, environmental equipment,
antennas, as well as general-purpose equipment required to manufacture and test
its products.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property the subject
of, any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the Company's fiscal year ended September 30, 2000.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Common Stock is traded on the NASDAQ under the symbol
"STST".
The following table sets forth the range of high and low actual sales
prices of the Common Stock for the periods indicated. Sale prices include prices
between dealers, may not reflect mark-ups, mark-downs or commissions and may not
represent final actual transactions.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ---- ---
<S> <C> <C>
December 31, 1998 4 1/2 3
March 31, 1999 5 5/8 4
June 30, 1999 5 1/4 4
September 30, 1999 7 1/2 5 1/16
December 31, 1999 6 3 17/32
March 31, 2000 5 4 1/2
June 30, 2000 4 3 13/16
September 30, 2000 5 1/2 3 3/4
</TABLE>
No dividends have been paid on the Company's Common Stock during the
last two fiscal years. Furthermore, the Company's line of credit contains
certain restrictions on payment of dividends. The Company currently intends to
retain all of its earnings to finance the growth and development of its business
and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future.
As of November 16, 2000, there were approximately 580 beneficial owners
of the Company's Common Stock, including 199 holders of record.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion provides information which management believes
is relevant to an assessment and understanding of the Company's operations and
financial condition. This discussion should be read in conjunction with the
consolidated financial statements and accompanying notes.
On June 9, 1998, S. T. Research Corporation ("STR") acquired Daedalus
Enterprises, Inc. ("DEI"). See Item 1 "Business: General Overview." The
Acquisition was accounted for as a reverse acquisition whereby STR was deemed to
have acquired DEI for financial reporting purposes.
OPERATING CYCLE
In accordance with industry practice, the Company classifies as current
assets amounts relating to long-term contracts which may have terms extending
beyond one year but are expected to be realized during the normal operating
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cycle of the Company. The liabilities in the accompanying balance sheets which
have been classified as current liabilities are those expected to be satisfied
by the use of assets classified as current assets. At September 30, 2000,
substantially all contracts to which the Company is a party will be completed
within the next 12 months. Therefore, substantially all current assets and
current liabilities are expected to be liquidated in the next 12 months.
RESULTS OF OPERATIONS
Revenue for the year ended September 30, 2000 was $22,706,000 compared
to $26,424,000 for the year ended September 30, 1999, a $3,718,000 or a 14%
decrease. The decrease primarily resulted from the substantial completion of the
U.S. Navy ESM Receiver Systems and the Bobcat contracts. The Bobcat contract
generated 28% of the 1999 revenue compared to 15% in 2000. The U.S. Navy ESM
Receiver contract generated 44% of the 1999 revenue compared to 7% in 2000. The
decrease in revenue experienced on the U.S. Navy ESM Receiver and Bobcat
contracts was in part replaced with additional revenue received primarily from
the U.S. Navy AN/BLQ-10 (V)1 and (V)2 and U.S. Navy Integrated Electronic
Warfare System (AIEWS) subcontracts from Lockheed Martin Corporation. The AIEWS
subcontract originated in late fiscal 1998, generating approximately 15% of the
1999 revenue compared to 25% of the 2000 revenue. The AN/BLQ-10 (V)1 and (V)2
subcontract originated in 2000 generating 8% of the 2000 revenue.
Customer funded development which is included in revenues was
$10,364,000 and $7,694,000 in fiscal years 2000 and 1999, respectively. The
increase in customer-funded development of $2,670,000 or 34.7% resulted from the
U.S. Navy Integrated Electronic Warfare System (AIEWS) subcontract from Lockheed
Martin Corporation and other government agency contract efforts.
The total amount of negotiated backlog, including both unfilled firm
orders for the Company's products for which funding has been authorized and
appropriated by the customer, and firm orders for which funding has not been
appropriated as of September 30, 2000 and 1999 was $7,033,000 and $17,106,000,
respectively. The majority of the authorized and appropriated unfilled orders at
September 30, 2000 of $7,033,000 are expected to be completed within a year.
Options on existing contracts approximated $44,265,000 at September 30, 2000.
The principal amount of options is primarily the result of the subcontract for
engineering and production of components of the Integrated Electronic Warfare
Systems (AIEWS) for the U.S. Navy surface ships. A portion of the options are
planned for exercise between the year 2002 and the year 2007 with potential
deliveries extending for an additional two years. However, the Company has no
assurances that the options will be exercised.
Cost of revenues, as a percentage of revenue, decreased from 72.8% for
the year ended September 30, 1999 to 71.3% for the year ended September 30,
2000. The Company attributes this decrease to refocusing on international market
penetration and staffing realignments.
During fiscal year 2000, general and administrative expenses decreased
from $4,251,000 to $3,974,000, a $277,000 or a 6.5% decrease from fiscal 1999.
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The decrease was due principally to decrease in traditional general and
administrative expenses resulting from efficiencies gained in automating
infrastructure support tools and staffing realignment.
Net interest expense of $40,000 for the year ended September 30, 1999,
compared to net interest income of $155,000 for the year ended September 30,
2000. During fiscal year 2000, the Company had no debt and invested its cash
balances in interest bearing cash equivalents.
Income tax expense for the years ended September 30, 2000 and 1999,
consist of federal and state income taxes. The Company's effective income tax
rate was 38.1% for the year ended September 30, 2000, and was 41.7% for the
year ended September 30, 1999. The rate varied from the statutory rate
primarily due to certain non-deductible expenses, and a reduction in valuation
allowance which resulted from changes in uncertainties in the Company's ability
to generate future taxable income based on the Company's sustained
profitability in 2000 and 1999 and future projections of taxable income.
Net income for the year ended September 30, 2000 was $1,666,000,
compared to net income of $1,689,000 for the year ended September 30, 1999. The
decrease of $23,000 was the result of decreased revenue not fully offset by
gains in operations efficiency and interest income in 2000.
LIQUIDITY AND SOURCES OF CAPITAL
At September 30, 2000, the Company's cash and cash equivalents totaled
$1,512,000 as compared to $3,076,000 at September 30, 1999. During the year
ended September 30, 2000, the net cash used by the Company by its operating
activities was $544,000, as compared to the net cash provided of $4,193,000 for
the fiscal year 1999, a decrease of $4,737,000. The decrease was attributable to
an increase in receivables, prepayment of federal and state income taxes, and a
pay-down of trade payables.
The net cash used by its investing activities during the year ended
September 30, 2000 was $784,000, as compared to cash provided for investing
activities of $1,012,000 during the year ended September 30, 1999. This decrease
is attributable to renovation of office and lab space at its Company
headquarters as well as modernization of its computer facilities. Capital
expenditures for the year ended September 30, 2000 were $784,000. The Company
has currently budgeted $556,000 for capital expenditures during fiscal 2001
including $56,000 principally for machinery and equipment, $210,000 for computer
hardware and software and $290,000 for facility improvements. The Company
expects to be able to finance these expenditures with available working capital
and credit facilities. During 1999 the Company received cash of $1,446,000 from
the sale of its building in Michigan.
The net cash used by the Company in financing activities during the year
ended September 30, 2000 was $236,000, compared to net cash used by financing
activities of $2,241,000 during the year ended September 30, 1999. For fiscal
year 2000, the net cash used was attributable to the repurchase of outstanding
Company stock and the pay-down of capital leases. For fiscal year 1999, the net
cash used was primarily devoted to reducing to zero the Company's line of
credit, borrowing and satisfying the mortgage on the real estate which was sold.
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The Company entered into a $3,000,000 line of credit and related note
payable with its bank on February 28, 1999, which expires on February 28, 2001.
At September 30, 2000, the Company was in compliance with the covenants
contained in the line of credit agreement. There were no amounts outstanding
under the line of credit at September 30, 2000. The Company believes that its
existing funds and amounts generated by operations will be sufficient to meet
its working capital needs through 2001. In addition, the Company plans to
renegotiate the $3,000,000 line of credit specified above, however, no
assurance can presently be made that it will obtain such financing.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. Under the statement, every derivative is recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the fair value of a derivative be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 is effective for fiscal years beginning after June 15, 2000 and, based
on the present nature of our operations, is not anticipated to have a material
impact on our results of operations or financial position.
In December 1999, the staff of the SEC issued Staff Accounting Bulletin
("SAB") 101, "Revenue Recognition in Financial Statements." SAB 101 outlines the
basic criteria that must be met to recognize revenue, and provides guidelines
for disclosure related to revenue recognition policies. This guidance is
required to be implemented in the fourth quarter of fiscal 2001. The Company is
currently reviewing this guidance in order to determine the impact of its
provisions, if any, on the consolidated financial statements.
IMPACT OF INFLATION
The Company's operations were not significantly affected by inflation.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in this report on
pages F-1 through F-20.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
There were no disagreements with the auditors.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Information relating to the Directors and Executive Officers of the
Company and compliance with Section 16(a) of the Exchange Act will appear
beneath the captions "Election of Directors," "Certain Information Regarding
Nominees," "Meetings and Committees of the Board," "Business Experience of
Executive Officers," "Compensation of Directors," and "Section 16(a), Beneficial
Ownership Reporting Compliance" in the Company's definitive Proxy Statement
which will be distributed in connection with its 2001 Annual Meeting of
Stockholders. Such Proxy Statement will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A and such information will be
incorporated herein by reference as of the date of such filing.
ITEM 10. EXECUTIVE COMPENSATION
Information relating to management remuneration and transactions will
appear beneath the caption "Executive Compensation" and "Employment Agreements"
in the Company's definitive Proxy Statement which will be distributed in
connection with its 2001 Annual Meeting of Stockholders. Such Proxy Statement
will be filed with the Securities and Exchange Commission pursuant to Regulation
14A and such information will be incorporated herein by reference as of the date
of such filing.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to the ownership of equity securities by management
and by beneficial owners of 5% or more of the Common Stock of the Company will
be set forth under the caption "Stock Ownership of Certain Beneficial Owners" in
the Company's definitive Proxy Statement which will be distributed in connection
with its 2001 Annual Meeting of Stockholders. Such Proxy Statement will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A and such
information will be incorporated herein by reference as of the date of such
filing.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and transactions between
the Company and its Officers and Directors will appear beneath the caption
"Certain Relationships and Related Transactions" in the Company's definitive
Proxy Statement which will be distributed in connection with its 2001 Annual
Meeting of Stockholders. Such Proxy Statement will be filed with the Securities
and Exchange Commission pursuant to Regulation 14A and such information will be
incorporated herein by reference as of the date of such filing.
In the event that the Company's definitive Proxy Statement to be
distributed in connection with its 2001 Annual Meeting of Stockholders is not
filed, or mailed for filing, with the Securities and Exchange Commission
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pursuant to Regulation 14A within 120 days of the end of the Company's most
recent fiscal year, the Company will amend this Report within such time period
to provide the information required by Part III hereof.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
(27) Financial Data Schedule (filed herewith)
(b) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the quarter ended September 30,
2000.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Sensytech, Inc. and subsidiary:
In our opinion, the accompanying consolidated balance sheets and the
related statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Sensytech, Inc. and
its subsidiary at September 30, 2000 and 1999, and the results of their
operations and their cash flows for each of the two years in the period ended
September 30, 2000, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Pittsburgh, PA
December 14, 2000
F-1
<PAGE> 17
SENSYTECH, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30,
------------------------------------
2000 1999
---------------- ---------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (Notes 1 and 3) $ 1,512,000 $ 3,076,000
Accounts receivable, net of allowance for
doubtful accounts of $215,000 in 2000 and $311,000
in 1999 5,460,000 3,215,000
Unbilled contract costs, net (Note 4) 3,625,000 4,924,000
Refundable and prepaid income taxes 1,057,000 -
Inventories 24,000 25,000
Deferred income taxes (Note 13) 459,000 717,000
Other current assets 119,000 151,000
---------------- ---------------
TOTAL CURRENT ASSETS 12,256,000 12,108,000
PROPERTY AND EQUIPMENT (Note 5) 1,627,000 1,403,000
OTHER ASSETS
Deferred income taxes (Note 13) 426,000 54,000
Goodwill, net of accumulated amortization of
$25,000 in 1999 (Notes 2 and 13) - 141,000
Other assets 75,000 81,000
---------------- ---------------
TOTAL ASSETS $ 14,384,000 $13,787,000
================ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 18
SENSYTECH, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30,
----------------------------------------
2000 1999
----------------- ------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 888,000 $ 1,486,000
Accrued salaries, benefits, and related expenses 1,185,000 1,267,000
Deferred compensation (Note 7) - 356,000
Accrued severance pay-current 420,000 257,000
Other accrued expenses 325,000 377,000
Income taxes payable (Note 13) - 355,000
Billings in excess of costs (Note 4) 485,000 466,000
Capital leases (Note 9) 38,000 42,000
----------------- ------------------
TOTAL CURRENT LIABILITIES 3,341,000 4,606,000
LONG-TERM LIABILITIES
Accrued severance pay 289,000 -
Capital leases (Note 9) - 69,000
----------------- ------------------
289,000 69,000
STOCKHOLDERS' EQUITY (Notes 2 and 11)
Common Stock, $.01 par value; 5,000,000 shares authorized,
September 30, 2000 and 1999; 4,021,347 and 3,987,940
shares issued and outstanding, September 30, 2000 and 1999 40,000 40,000
Additional paid-in capital 7,290,000 7,099,000
Unearned stock-based compensation (Note 11) (55,000) (125,000)
Treasury stock at cost, 72,000 shares (Note 12) (285,000) -
Retained earnings 3,764,000 2,098,000
----------------- ------------------
10,754,000 9,112,000
----------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,384,000 $ 13,787,000
================= ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 19
SENSYTECH, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
For the Year Ended
September 30,
2000 1999
---------------- ----------------
<S> <C> <C>
REVENUE
Contract revenue $ 22,706,000 $ 26,424,000
---------------- ----------------
COSTS AND EXPENSES
Cost of revenues 16,195,000 19,237,000
General and administrative expenses 3,974,000 4,251,000
---------------- ----------------
Total costs and expenses 20,169,000 23,488,000
---------------- ----------------
INCOME FROM OPERATIONS 2,537,000 2,936,000
OTHER EXPENSES
Interest income (expense), net 155,000 (40,000)
---------------- ----------------
INCOME BEFORE INCOME TAXES 2,692,000 2,896,000
INCOME TAX PROVISION (Note 13) (1,026,000) (1,207,000)
---------------- ----------------
NET INCOME $ 1,666,000 $ 1,689,000
================ ================
PER SHARE AMOUNT (Note 1)
Basic earnings per share $ 0.42 $ 0.42
Diluted earnings per share $ 0.40 $ 0.40
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 20
SENSYTECH, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Unearned
Common Stock Paid-in Stock-based Treasury Retained
Shares Amount Capital Compensation Stock Earnings
------------ --------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1998 3,961,271 $ 40,000 $ 6,858,000 - - $ 409,000
Net income - - - - - 1,689,000
Exercise of stock options 12,400 - 74,000 - - -
Unearned stock-based compensation (Note 11) 14,269 - 167,000 (167,000) - -
Amortization of stock-based compensation - - - 42,000 - -
------------ --------- ------------ ------------ ----------- -----------
BALANCE AT SEPTEMBER 30, 1999 3,987,940 $ 40,000 $ 7,099,000 $ (125,000) $ - $2,098,000
Net income - - - - - 1,666,000
Employee stock purchase 9,927 - 42,000 - - -
Exercise of stock options 23,480 - 80,000 - - -
Unearned stock-based compensation (Note 11) - - 110,000 (110,000) - -
Amortization of stock-based compensation, - - - 139,000 - -
net of forfeitures of $11,000
Forfeiture of stock options - - (41,000) 41,000 - -
Purchase of treasury shares - - - - (285,000) -
------------ --------- ------------ ------------ ----------- -----------
BALANCE AT SEPTEMBER 30, 2000 4,021,347 $ 40,000 $ 7,290,000 $ (55,000) $ (285,000) $3,764,000
============ ========= ============ ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Total
Stockholders'
Equity
---------------
<S> <C>
BALANCE AT SEPTEMBER 30, 1998 $ 7,307,000
Net income 1,689,000
Exercise of stock options 74,000
Unearned stock-based compensation (Note 11) -
Amortization of stock-based compensation 42,000
---------------
BALANCE AT SEPTEMBER 30, 1999 $ 9,112,000
Net income 1,666,000
Employee stock purchase 42,000
Exercise of stock options 80,000
Unearned stock-based compensation (Note 11) -
Amortization of stock-based compensation, 139,000
net of forfeitures of $11,000
Forfeiture of stock options -
Purchase of treasury shares (285,000)
---------------
BALANCE AT SEPTEMBER 30, 2000 $ 10,754,000
===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 21
SENSYTECH, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
September 30,
---------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,666,000 $ 1,689,000
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 576,000 689,000
Provision (credit) for doubtful accounts (96,000) 311,000
Amortization of deferred compensation 139,000 42,000
Deferred taxes 11,000 (247,000)
Inventory writedown - 391,000
Cash provided (used) by assets and liabilities:
Accounts receivable (2,149,000) 1,556,000
Unbilled contract costs 1,299,000 (686,000)
Inventories 1,000 120,000
Other current assets 32,000 (62,000)
Refundable and prepaid income taxes (1,412,000) 311,000
Income taxes payable - 661,000
Accounts payable (598,000) (1,068,000)
Other accrued expenses (19,000) 450,000
Other 6,000 36,000
-------------- --------------
Net cash (used in) provided by operating activities (544,000) 4,193,000
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (784,000) (434,000)
Proceeds from disposal of property held for sale - 1,446,000
-------------- --------------
Net cash (used in) provided by investing activities (784,000) 1,012,000
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under line of credit - (2,049,000)
Principal payments on mortgage debt - (220,000)
Principal payments on capital lease obligations (73,000) (46,000)
Proceeds from employee stock purchases 42,000 -
Proceeds of stock option exercises 80,000 74,000
Payments on purchase of Treasury Stock (285,000) -
-------------- --------------
Net cash (used in) financing activities (236,000) (2,241,000)
-------------- --------------
Net (decrease) increase in cash and cash equivalents (1,564,000) 2,964,000
Cash and cash equivalents, beginning of period 3,076,000 112,000
-------------- --------------
Cash and cash equivalents, end of period $ 1,512,000 $ 3,076,000
============== ==============
Supplemental disclosure of cash flow information:
Cash received for income taxes 7,000 -
============== ==============
Cash paid for interest 5,000 71,000
============== ==============
Cash paid for income taxes $ 2,435,000 $ 480,000
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 22
SENSYTECH, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITIES:
Sensytech, Inc. and subsidiary (the "Company") primarily defines,
designs, develops and manufactures systems and equipment for integrated passive
surveillance systems for military and commercial customers.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Sensytech,
Inc. and its wholly owned subsidiary, Daedalus Enterprises Export Corporation.
All intercompany transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS:
For purposes of the statement of cash flows, the Company considers all
unrestricted highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.
INVENTORIES:
Inventories are stated at the lower of cost or market, determined on the
first-in, first-out basis. Inventories consist of component parts.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost and are depreciated over
estimated useful lives ranging from three to eight years using straight-line and
double declining balance methods. Leasehold improvements are amortized over the
life of the improvement or length of lease term, whichever is shorter, using the
straight-line method. Amortization of leasehold improvements and capital lease
obligations are included in depreciation expense. The cost and accumulated
depreciation or amortization of assets sold or retired are removed from the
respective accounts and any gain or loss is reflected in other income
(expenses).
REVENUE RECOGNITION:
The estimated revenue for performance under Government fixed-price and
cost-type contracts, including customer-funded research and development, is
recognized under the percentage of completion method of accounting whereunder
F-7
<PAGE> 23
the estimated revenue is determined on the basis of completion to date (the
total contract amount multiplied by percent of performance to date less revenue
value recognized in previous periods). Revenues under cost-reimbursement
contracts are recorded as costs are incurred and include estimated earned fees
in the proportion that costs incurred to date bear to total estimated costs.
The fees under certain Government contracts may be increased or decreased in
accordance with cost or performance incentive provisions which measure actual
performance against established targets or other criteria. Such incentive fee
awards or penalties, which historically are not material, are included in
revenue at the time the amounts can be determined reasonably. Anticipated
losses are recognized at the time they become known. It is reasonably possible
that future operating results may be effected if actual contract costs incurred
differ from total contract costs currently estimated by management.
RESEARCH AND DEVELOPMENT:
Internally funded research and development costs are included in general
and administrative expenses in the consolidated income statements. The amount of
internally funded research and development costs expensed during 2000 and 1999
was $932,000 and $540,000, respectively.
INCOME TAXES:
Deferred tax assets and liabilities have been established for the
temporary differences between financial statement and tax bases of assets and
liabilities existing at the balance sheet date using expected tax rates. A
valuation allowance is recorded to reduce deferred income taxes to that portion
that is expected to more likely than not be realized.
USE OF ESTIMATES:
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amount 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 periods. Accordingly, actual results could differ from those
estimates.
OPERATING CYCLE:
In accordance with industry practice, the Company classifies as current
assets amounts relating to long-term contracts which may have terms extending
beyond one year but are expected to be realized during the normal operating
cycle of the Company. The liabilities in the accompanying balance sheets which
have been classified as current liabilities are those expected to be satisfied
by the use of assets classified as current assets. At September 30, 2000,
substantially all contracts in progress are expected to be completed within the
next 12 months. Therefore, substantially all current assets and current
liabilities are expected to be liquidated in the next 12 months.
F-8
<PAGE> 24
LONG-LIVED ASSETS:
Costs in excess of net assets acquired (goodwill) are amortized on the
straight-line method over ten years. The Company regularly reviews the
individual components of the balances of all of its long-term assets by
analyzing the future recoverability of the assets and recognizes, on a current
basis, any diminution in value.
EARNINGS PER SHARE:
Basic earnings per share is computed using the weighted average number
of common shares outstanding during each period. Diluted earnings per share is
computed using the weighted average number of common and common equivalent
shares outstanding during each period. The following summary is presented for
the years ended:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
2000 1999
---- ----
<S> <C> <C>
Net income $1,666,000 $1,689,000
Weighted average shares outstanding - basic 3,997,000 3,976,000
Basic earnings per share $ .42 $ .42
Effect of dilutive securities:
Shares issuable upon exercise of stock options 148,000 233,000
---------- ----------
Weighted average shares outstanding - diluted 4,145,000 4,209,000
Diluted earnings per share $ .40 $ .40
</TABLE>
RECLASSIFICATIONS:
Certain amounts in the 1999 financial statements have been reclassified
to conform to the 2000 presentation.
NOTE 2 - ACQUISITIONS
On June 9, 1998, S.T. Research Corporation ("STR") acquired Daedalus
Enterprises, Inc. ("DEI") in an acquisition whereby the outstanding STR shares
were converted into approximately 86.5% of the issued and outstanding shares of
DEI (the "Acquisition"). As part of this overall transaction, DEI changed its
name to Sensytech, Inc. While DEI was the legal acquirer, the Acquisition was
accounted for as a reverse acquisition whereby STR was deemed to have acquired
DEI for financial reporting purposes.
At the Acquisition date, DEI had net operating loss carryforwards
(NOLs) of approximately $2,575,000 and tax credits of approximately $40,000. The
acquired NOLs and tax credits are limited as to use under the Internal Revenue
Code. A portion of the NOLs were reserved through a recording of a valuation
reserve at the acquisition date. To the extent that the remaining reserved NOLs
become realized, the corresponding tax benefit will first be used to reduce
goodwill to zero and thereafter will serve to reduce any provision for income
taxes.
F-9
<PAGE> 25
The Company recorded goodwill of $802,000 in connection with the
acquisition. During fiscal year 1999, goodwill was reduced by $629,000 for the
utilization of acquired net operating loss carryforwards (NOLs), the gain on
the sale of the Michigan facility (Note 9) and the reversal of certain
estimated liabilities recorded in connection with the Acquisition. During
fiscal year 2000, goodwill was further reduced by $125,000 for the utilization
of acquired NOLs and reversal of the valuation allowance on the acquired NOLs.
NOTE 3 - CASH HELD IN TRUST - RESTRICTED
On January 1, 1990, the Company established a health and disability
benefit plan pursuant to the Employee Retirement Income Security Act of 1974 for
employees and their dependents. The Company funds the plan by making periodic
deposits to a zero balance account administered by an independent third party
administrator (TPA). The Company is responsible for funding all proper claims
adjudicated or processed by the TPA. The Company maintains individual claim and
aggregate stop loss coverage. The Company records a liability in the financial
statements for known claims outstanding and an estimate based on prior
experience, of incurred but not reported claims. During 1999, a trust account
was maintained which had a balance of $37,000 as of September 30, 1999, and such
amount is included in cash and cash equivalents in the accompanying balance
sheet. There were no amounts in the trust or zero balance cash accounts at
September 30, 2000. The Company accrued liabilities of $130,000 and $76,000 at
September 30, 2000 and 1999, respectively, under its health and disability plan.
NOTE 4 - UNBILLED CONTRACT COSTS, NET
The status of accumulated costs incurred and progress billings on
uncompleted contracts at September 30, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
2000 1999
---- ----
<S> <C> <C>
Accumulated costs incurred and
estimated earnings on uncompleted
contracts $ 3,774,000 $ 7,298,000
Progress billings and advances on
uncompleted contracts (634,000) (2,840,000)
----------- -----------
Total $ 3,140,000 $ 4,458,000
=========== ===========
</TABLE>
The above amounts are included in the balance sheet at September 30,
2000 and 1999 as follows:
F-10
<PAGE> 26
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
2000 1999
---- ----
<S> <C> <C>
Costs and estimated earnings in excess
of billings (unbilled contract costs)
on uncompleted contracts $ 3,625,000 $ 4,924,000
Billings in excess of costs and estimated
earnings on uncompleted contracts (485,000) (466,000)
------------ ------------
Total $ 3,140,000 $ 4,458,000
============ ============
</TABLE>
Unbilled costs and accrued profit on contracts in progress comprise
principally amounts of revenue recognized on contracts for which billings had
not been presented to the customer because the amounts were not billable at the
balance sheet date. It is anticipated such unbilled amounts receivable at
September 30, 2000 will be billed over the next 270 days as products and/or
services are delivered. Retainages, which approximate $131,000 at September 30,
2000, will be billed and collected as contracts are finalized with the customer.
At September 30, 2000 and 1999, there are no significant unrecovered costs or
estimated profits subject to future negotiation.
Receivables under certain Government contracts are based on provisional
rates that permit recovery of overhead not exceeding certain limits. These
overhead rates are subject to audit on an annual basis by the Defense Contract
Audit Agency (DCAA). When final determination and approval of the allowable
rates have been made, receivables may be adjusted accordingly. In management's
opinion, any adjustments will not be material. The DCAA has completed their
audit of the rates through September 30, 1998.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows at September 30:
<TABLE>
<CAPTION>
2000 1999
----------- ------------
<S> <C> <C>
Furniture and fixtures $ 130,000 $ 123,000
Machinery and equipment 3,642,000 3,195,000
Leasehold improvements 795,000 504,000
Equipment capitalized under capital
leases 51,000 101,000
----------- ------------
Subtotal 4,618,000 3,923,000
Less accumulated depreciation (2,991,000) (2,520,000)
----------- ------------
Total $ 1,627,000 $ 1,403,000
=========== ============
</TABLE>
Depreciation expense was approximately $560,000 and $677,000 for the
years ended September 30, 2000 and 1999, respectively.
F-11
<PAGE> 27
NOTE 6 - NOTE PAYABLE - LINE OF CREDIT
Effective February 28, 1999, the Company entered into a line of credit
and related note payable with its bank. The agreement expires February 28, 2001,
and provides a maximum available line of credit of $3,000,000. However, the
total borrowing base generally cannot exceed the sum of 90% of qualified
Government accounts receivable and 80% of qualified non-Government accounts
receivable.
The bank agreement establishes the interest rate at the LIBOR rate (6.6%
at September 30, 2000) plus 225 to 300 basis points, determined by the Company's
ratio of funded debt to earnings before interest, taxes, depreciation and
amortization. All borrowings under the line of credit and the performance of the
Company's obligations under the line of credit agreement are collateralized by
the Company's accounts receivable, equipment, contracts, and general
intangibles. The agreement also contains various covenants as to dividend
restrictions, working capital, tangible net worth, earnings and debt-to-equity
ratios. At September 30, 2000 and 1999, respectively, no amounts were
outstanding. Unused commitment fees of one quarter of one percent per annum are
required.
NOTE 7 - DEFERRED COMPENSATION
The Company has a Non-Qualified Deferred Compensation Plan whereby
certain employees may defer compensation with such deferrals taking the status
of a general obligation of the Company. The balance bears interest at prime plus
one-half percent. Benefits under this plan were paid in full during 2000.
At September 30, 2000, accrued severance pay relates to amounts payable
to two former officers of the Company. Such amounts are payable monthly through
May 2002.
NOTE 8 - EMPLOYEE BENEFIT PLANS
At September 30, 2000, the Company's sole qualified deferred
compensation plan ("the Plan") consisted of two components. The Plan is
comprised of a 401(k) plan and a profit sharing plan. Included in the Plan are
the former DEI Defined Contribution Pension Plan assets and the former S.T.
Research Corporation employee stock ownership plan ("ESOP") assets. In June
1998, the Plan was amended to merge with the employee stock ownership plan. The
amendment afforded Plan participants to liquidate their ESOP shares at market
prices and self-direct the proceeds. Also, in June of 1998, the Plan was amended
to allow for self-direction investments of profit sharing contributions.
To participate in the Plan, eligible employees must have attained 21
years of age. Eligible employees may elect to participate in the Company's
401(k) plan on January 1 and July 1. In 2000 and 1999, the Company matched 50%
of the first six percent of employee contributions, which match amounted to
$132,000 in 2000 and $183,000 in 1999.
The total number of Company shares allocated to participants under the
profit sharing plan at September 30, 2000 and 1999, including shares formerly in
the ESOP and 401(k) Plans, was 408,612 and 514,888, respectively.
F-12
<PAGE> 28
NOTE 9 - LEASE COMMITMENTS
OPERATING LEASES:
The Company, effective June 30, 1999, signed a non-cancelable 15-year
lease with a third party for the real estate at its principal location in
Virginia. Prior to June 30, 1999, the facilities had been leased from
partnerships (the "partnerships") in which an officer, employees and
stockholders of the Company are partners. The risk and rewards associated with
the facilities and the obligations imposed by the partnerships' debt and other
general obligations resided with the partnerships.
On September 2, 1998, the Company entered into a sales agreement for a
property held for sale in Michigan. The Company sold their Michigan facility on
December 1, 1998. The Company entered into a five-year lease for a portion of
the facility with the new owner.
The Company also leases various equipment under non-cancelable operating
leases.
Rent expense for the years ended September 30, 2000 and 1999 was
$897,000 and $835,000, respectively, which included $314,000 in 1999, associated
with leases from related parties. At September 30, 2000, minimum rental payments
under operating leases for facilities and equipment are as follows:
<TABLE>
<S> <C>
2001 $ 806,000
2002 807,000
2003 814,000
2004 613,000
2005 498,000
Remainder 5,096,000
------------
Total $ 8,634,000
============
</TABLE>
The Company subleases to a third party a portion of its facility at its
principal location in Virginia. At September 30, 2000, minimum rentals to be
received under the sublease through the expiration of the lease in fiscal year
2001 are $33,000.
CAPITAL LEASES:
At September 30, 2000 and 1999, the Company was obligated under capital
leases for equipment having net book values of $51,000 and $101,000, and
accumulated depreciation of $92,000 and $42,000,respectively. The following
schedule summarizes the future minimum lease payments:
F-13
<PAGE> 29
<TABLE>
<CAPTION>
YEARS ENDING SEPTEMBER 30, 2000
-------------------------- ----------
<S> <C>
2001 $ 39,000
2002 --
2003 --
2004 --
2005 --
----------
Subtotal 39,000
Less amount representing interest (1,000)
----------
Present value of minimum lease obligations 38,000
Less current portion (38,000)
----------
Capital leases payable - long-term portion $ 0
==========
</TABLE>
NOTE 10 - STOCK OPTIONS
The Company has an Incentive Stock Option Plan established in 1983
("1983 Plan"), and a Long-Term Incentive Plan and a Non-Employee Director Stock
Option Plan established in 1995 (collectively the "1995 Plans"). The Long-Term
Incentive Plan provides for the granting of options, restricted stock and/or
performance awards to key employees and the Non-Employee Director Stock Option
Plan provides for the granting of options to outside members of the Board of
Directors to purchase common stock of the Company at the fair market value at
the date of the grant. There are 149,200 exercisable options outstanding at
September 30, 2000 in the Long-Term Incentive Plan. There are no exercisable
options or stock appreciation rights outstanding under the 1983 Plan at
September 30, 2000. No additional options can be granted under the 1983 Plan.
The Non-Employee Director Stock Option Plan was amended to prohibit future
granting of options.
The Company also has a 1991 Stock Option Plan, the ("1991 Plan") and a
1996 Stock Option Plan, the ("1996 Plan"). The 1991 Plan and the 1996 Plan have
25,800 and 25,800 exercisable options that are outstanding at September 30,
2000, respectively.
Options under all of the aforementioned Plans generally vest over a
three to five year period and expire after ten years.
Stock option activity is summarized as follows:
F-14
<PAGE> 30
<TABLE>
<CAPTION>
1995 WEIGHTED AVERAGE
PLANS EXERCISE PRICE
----- --------------
<S> <C> <C>
Balance at Sept. 30, 1998 38,975 $ 2.82
Exercised (12,400) 2.47
Granted 428,500 3.07
Expired (375) 2.25
Forfeited (103,000) 3.04
------------- -------
Balance at Sept. 30, 1999 351,700 3.02
Exercised (9,400) 2.91
Granted 30,500 4.58
Expired -- --
Forfeited (158,200) 3.15
------------- -------
Balance at Sept. 30, 2000 214,600 $ 3.15
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE 1996 WEIGHTED AVERAGE
1991 PLAN EXERCISE PRICE PLAN EXERCISE PRICE
--------- -------------- ---- --------------
<S> <C> <C> <C> <C>
Balance at Sept. 30, 1998 25,800 $ 0.75 41,280 $ 3.37
Exercised -- -- -- --
Granted -- -- -- --
Expired -- -- -- --
Forfeited -- -- -- --
--------- ---------- ---------- ------
Balance at Sept. 30, 1999 25,800 0.75 41,280 3.37
Exercised -- -- (15,480) 3.37
Granted -- -- -- --
Expired -- -- -- --
Forfeited -- -- -- --
--------- ---------- ---------- ------
Balance at Sept. 30, 2000 25,800 $ 0.75 25,800 $ 3.37
</TABLE>
Total shares of common stock reserved pursuant to the aforementioned
plans and the non-qualified options are 461,780.
The weighted average grant date fair value of options granted for the
1995 Plans during 2000 was $4.58 and during 1999 was $2.47. Total shares
exercisable at September 30, 2000 and 1999 were 149,200 and 136,280 with a
weighted average exercise price of $2.47 and $2.45, respectively.
The Black-Scholes model was used to estimate the fair value of the
options. Significant assumptions include a risk-free interest rate of 6.0%, a
volatility rate of 67.8%, and an expected life equal to the term of the options.
The following summarizes information about stock options outstanding at
September 30, 2000:
F-15
<PAGE> 31
<TABLE>
<CAPTION>
2000
NUMBER RANGE OF WEIGHTED AVERAGE
OUTSTANDING EXERCISES PRICES REMAINING LIFE
----------- ---------------- --------------
<S> <C> <C> <C>
1995 Option Plans 176,800 $2.25 to $3.25 7.7 years
1995 Option Plans 34,300 $3.50 to $5.25 5.7 years
1995 Option Plans 3,500 $5.88 to $6.00 7.7 years
1991 Option Plan 25,800 $ 0.75 .3 years
1996 Option Plan 25,800 $ 3.37 6.2 years
---------- -------------- ---------
266,200 $0.75 to $6.00 6.6 years
========== ============== =========
</TABLE>
The Company continues to account for stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees," under which no compensation cost for
stock options is recognized for stock option awards granted at or above fair
market value. Had compensation expense for the Company's five stock-based
compensation plans been determined based upon fair values at the grant dates for
awards under those plans in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below for the years
ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
DILUTED
BASIC EARNINGS EARNINGS
NET INCOME PER SHARE PER SHARE
---------- --------- ---------
<S> <C> <C> <C>
2000:
As reported $1,666,000 $.42 $.40
Pro forma $1,571,000 $.39 $.38
1999:
As reported $1,689,000 $.42 $.40
Pro forma $1,488,000 $.37 $.35
</TABLE>
NOTE 11 - STOCK PURCHASE PLAN AND UNEARNED COMPENSATION
The Company reserved 100,000 shares of common stock for sale to eligible
employees through payroll deductions over six month periods pursuant to the 1983
Employee Stock Purchase Plan (the "Purchase Plan"). The purchase price is the
lower of 90% of the fair market value of the stock on the first or last day of
the purchase period. Under the Purchase Plan, 9,927 shares were issued in 2000
and 14,269 were issued in 1999, at an average price of $4.13 and $3.04 per
share, respectively. At September 30, 2000 and 1999, there were 40,272 and
50,199 shares, respectively, available for future purchase.
The Company adopted an incentive bonus plan that provides for a portion
of the annual award to be paid in the form of stock of the Company subject to
vesting requirements. In 1999, 21,141 shares were issued at a weighted average
F-16
<PAGE> 32
fair market value of $5.88 per share. As part of the 2000 incentive bonus
compensation, 47,717 shares have been reserved for issuance at a weighted
average fair market value of $3.63 per share. These shares will be issued upon
the completion of the vesting period. Unearned stock-based compensation
consists of the remaining unamortized portion of such stock award. The Company
amortized $150,000 and $42,000 in 2000 and 1999, respectively.
NOTE 12 - TREASURY STOCK
During 2000, the Company began acquiring shares of its common stock in
connection with a stock repurchase program announced in May 2000. That program
authorizes the Company to purchase up to 500,000 common shares from time to time
on the open market. The Company purchased 72,000 shares of common stock at an
aggregate cost of $285,000. The purpose of the stock repurchase is to help the
Company achieve its goal of enhancing stockholder value.
NOTE 13 - INCOME TAXES
The income tax provision (benefit) for the years ended September 30,
2000 and 1999 consisted of the following:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
CURRENT:
Federal $ 831,000 $1,261,000
State 184,000 193,000
DEFERRED:
Federal 6,000 (223,000)
State 5,000 (24,000)
---------- ----------
$1,026,000 $1,207,000
========== ==========
</TABLE>
The Company's deferred tax assets by tax jurisdiction are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 1999
---------- ----------
<S> <C> <C>
Federal $796,000 $655,000
State 89,000 116,000
-------- --------
Total $885,000 $771,000
======== ========
</TABLE>
Deferred tax assets (liabilities) consist of the following:
F-17
<PAGE> 33
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 1999
----------- -----------
<S> <C> <C>
Deferred compensation $ -- $ 136,000
Accrued vacation 95,000 110,000
Inventory reserve 2,000 149,000
Deferred expenses -- 55,000
Accrued severance 269,000 98,000
Net operating losses and tax
credits 323,000 354,000
Uncollectible accounts 82,000 118,000
Other, net 114,000 71,000
----------- -----------
Sub-total $ 885,000 $ 1,091,000
Less: Valuation allowance -- (320,000)
----------- -----------
$ 885,000 $ 771,000
=========== ===========
</TABLE>
The provision for income taxes from income from operations in 2000 and
1999 varied from the U.S. statutory rate for the following reasons:
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Federal statutory rate 34.0% 34.0%
State income taxes, net of
federal tax benefit 4.6 4.0
Change in valuation allowance (7.2) --
Prior year items 6.2 --
Other, net .5 3.7
------ ------
38.1% 41.7%
====== ======
</TABLE>
The net operating loss carryforwards (NOLs) expire principally in 2011,
2012, and 2013. The NOLs were acquired in the Acquisition and are subject to
limitations as to their utilization under the Internal Revenue Code. As a result
of uncertainties as to the Company's ability to generate sufficient taxable
income in future periods, the Company provided a valuation allowance on the
opening balance sheet for a portion of the NOLs acquired in the Acquisition. To
the extent that these NOLs become realized, or that the valuation
allowance on these NOLs is reduced, the corresponding tax benefits are first
used to reduce goodwill to zero and thereafter will serve to reduce any
provision for income taxes.
During 2000 and 1999, the Company reduced the valuation allowance by
$320,000 and $68,000, respectively. The reduction in the valuation allowance
resulted from changes in the uncertainties surrounding the Company's ability to
generate future taxable income based on the Company's sustained profitability in
2000 and 1999 and future projections of taxable income.
The change in the valuation allowance in 1999 and $125,000 of the change
in 2000 was used to reduce goodwill. The remaining change in the valuation
allowance in 2000 of $195,000 served to reduce income tax expense.
F-18
<PAGE> 34
NOTE 14 - CONCENTRATIONS OF CREDIT RISK
As of September 30, 2000 and 1999, the Company had funds on deposit in
excess of the federally insured amount with a bank. Approximately 90% of the
Company's revenues are generated from contracts with U.S. Government agencies or
U.S. Government contractors. During the years ended September 30, 2000 and 1999,
the Company recorded revenues from three significant contracts. For 2000, those
contracts include the U.S. Navy Integrated Electronic Warfare Systems (AIEWS)
subcontract from Lockheed Martin Corporation, the U.S. Navy AN/BLQ-10 (V)1 and
(V)2 contract, and the U.S. Navy Bobcat Systems contract. For 1999, those
contracts included the U.S. Navy Integrated Electronic Warfare System (AIEWS)
subcontract from Lockheed Martin Corporation, the U.S. Navy ESM Receiver Systems
contract, and the U.S. Navy Bobcat Systems contract. Revenues from these
contracts amounted to 25%, 8%, and 15% of fiscal year 2000 total revenue and
15%, 44%, and 28% of fiscal year 1999 total revenue, respectively.
Companies which are engaged in the supply of defense-related equipment
to the Government are subject to certain business risks, some of which are
peculiar to that industry. Among these are: the cost of obtaining trained and
skilled employees; the uncertainty and instability of prices for raw materials
and supplies; the problems associated with advanced designs, which may result in
unforeseen technological difficulties and cost overruns; and the intense
competition and the constant necessity for improvement in facilities and
personnel training. Sales to the Government may be affected by changes in
procurement policies, budget considerations, changing concepts of national
defense, social and economic developments abroad and other factors.
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Based on existing rates, economic conditions and the short maturities,
the carrying amounts of all the financial instruments at September 30, 2000 and
1999 are reasonable estimates of their fair values. The Company's financial
instruments include cash and cash equivalents, accounts receivable, accounts
payable and the capital lease obligations.
NOTE 16 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. Under the statement, every derivative is recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the fair value of a derivative be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 is effective for fiscal years beginning after June 15, 2000 and, based
on the present nature of our operations, is not anticipated to have a material
impact on our results of operations or financial position.
In December 1999, the staff of the SEC issued Staff Accounting Bulletin
("SAB") 101, "Revenue Recognition in Financial Statements." SAB 101 outlines the
F-19
<PAGE> 35
basic criteria that must be met to recognize revenue, and provides guidelines
for disclosure related to revenue recognition policies. This guidance is
required to be implemented in the fourth quarter of fiscal 2001. The Company is
currently reviewing this guidance in order to determine the impact of its
provisions, if any, on the consolidated financial statements.
NOTE 17 - SEGMENTS AND EXPORT SALES/FOREIGN OPERATIONS
The Company operates in one segment, the passive surveillance system
segment. The Company had export sales to various foreign countries which
amounted to $1,734,000 and $1,474,000 in 2000 and 1999, respectively. The
Company has no foreign operations.
F-20
<PAGE> 36
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Form 10-KSB to be
signed on its behalf by the undersigned, thereunto duly authorized.
SENSYTECH, INC.
(Registrant)
By: /s/ S. Kent Rockwell
----------------------------
S. Kent Rockwell
Chairman of the Board of Directors, Chief
Executive Officer, and President
Date: December 22, 2000
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ S. Kent Rockwell Director and Chief Executive Officer
------------------------------------
S. Kent Rockwell
Date: December 22, 2000
/s/ Donald F. Fultz Chief Financial Officer
------------------------------------ (Principal Financial & Accounting Officer)
Donald F. Fultz
Date: December 22, 2000
/s/ S. R. Perrino Director
------------------------------------
S. R. Perrino
Date: December 22, 2000
/s/ Charles W. Bernard Director
------------------------------------
Charles W. Bernard
Date: December 22, 2000
/s/ Philip H. Power Director
------------------------------------
Philip H. Power
Date: December 22, 2000
/s/ John D. Sanders Director
------------------------------------
John D. Sanders
Date: December 22, 2000
/s/ John Irvin Director
------------------------------------
John Irvin
Date: December 22, 2000
</TABLE>
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